1. Suppose a firm decides to minimize its holdings of current asse.docx

1. Suppose a firm decides to minimize its holdings of current
assets, relative to sales. Which statements are true?
Answer
1.
The firm's expected profits will decrease.
2.
The firm's expected profits will increase.
3.
The risk of the firm's profits will decrease.
4.
The risk of the firm's profits will increase.
2. A firm uses the EOQ model to detemine its optimal order
quantity, but is considering adding a safety stock of 1,000 units
to meet unexpected demand, or to cover demand during
variations in lead time. Check all of the statements that are
correct if it starts holding safety stocks.
Answer
a.
The firm's annual total carrying cost (TCC) will increase.
b.
The firm's annual total ordering cost (TOC) will decrease.
c.
The firm's annual total inventory cost (TIC) will increase.
3. Match the term in the left column with the description in the
right column.
credit period length of time customers are given to pay for
purchases

discount reduction in amount owed if invoice is paid
early
credit standard required financial strength of acceptable
credit customer
collection policy procedures followed to collect past-due
accounts
Inventory Management
FIN 340
Prof. David S. Allen
Northern Arizona University
Types of InventoryRaw materials inventory:
Factors of production that will be used in a later stage of
production or assembly.Work-in-progress inventory:
Partially assembled or completed goods.Finished goods
inventory:
Items ready for distribution or sale.
Types of InventoryIndependent items: Have demand unrelated
to the requirements for other items, e.g. finished goods.
Independent items lend themselves to analysis by quantitative
techniques.Dependent items: Derive their demand from the need
for other items or finished products, e.g. raw materials or work-
in-progress.
The demand for the end product is used to infer demand for its
components, subcomponents, and raw materials, This is

combined with the existing inventory balances to establish a net
requirement.
Benefits of Holding InventoryFor finished goods, most
marketing analyses suggest that product availability is the most
important factor in customer satisfaction.The ability to order in
larger lot sizes can create economies of scale in pricing,
handling, and setups.In manufacturing, inventory decouples
supply and demand. It makes possible longer production runs
and more flexibility in the manufacturing process.Inventory also
can enhance firm liquidity. In periods of high cash flows, the
firm can invest excess cash in building up inventory. When
cash flows are lower, the firm can sell off excess inventory
without replacing it in order to generate cash.
Costs of Holding InventoryOrdering costs: The fixed and
variable costs resulting from the placement and processing of an
order.
These include freight, labor, and handling charges. They are
generally assumed to be proportional to the number of orders
placed. In a production setting, these correspond to setup costs,
i.e. the costs associated with delays and costs in resetting
machinery to accommodate a different item.
Costs of Holding InventoryCarrying costs:
Cost of capital
Storage costs
Deterioration and obsolescence costs
Insurance costs
Handling costs

Carrying costs are usually assumed to be proportional to the
average inventory level. They are often split into financing
costs (the first item above) and holding costs (all others above).
Costs of Holding InventoryApprox. annual cost as percentage of
inventory valueCarrying costsCost of capital12.0%Storage and
handling0.5%Insurance0.5%Property taxes1.0%Depreciation
and obsolescence12.0%Total26%Ordering, shipping, and
receiving costsCost of placing orders, including production and
set-up costsVariesShipping and handling2.5%Cost of stock-
outsLoss of salesVariesLoss of customer
goodwillVariesDisruption of production schedulesVaries

Factors Influencing Inventory ManagementEffective inventory
management is complicated by a number of factors:
Uncertainty: The inability to perfectly anticipate supply and
demand.
Problems with cost and benefit assessments: Costs and benefits
are difficult to quantify.
Variety in product: Perishability, value, demand, and
interaction with other products are difficult to model.
Constraints: Limitations on financing, storage, and supply can
lead to suboptimal decisions.
Inventory Management SystemsEarly inventory management
focused on quantitative approaches to determining optimal order
sizes, such of EOQ. This was followed by techniques that
focused more on order timing, such as materials requirements
planning (MRP). These two focuses have had varying degrees
of success.More recently, the focus has been on "stockless" or
just-in-time (JIT) systems, which emphasize minimal inventory
levels.
Inventory Management SystemsAn important reason for holding
inventory is the inability of the company to synchronize
delivery with demand. The traditional western inventory system
is thus a "just-in-case" type.
Large safety stocks are held to cover the uncertainty of demand
because of long and variable lead time or because of lumpiness
in the production process.
Much of the inventory management revolves around what to do
because of this lead time.

Inventory Management SystemsJust-in-time is a philosophy for
managing inventory that seeks to identify and eliminate waste
and bottlenecks in the supply chain.By holding little or no
inventory, problems become apparent, and demand a solution.
Just-in-TimeJIT requires at least eight factors to be effective:
short distances between buyer and supplier
dependable quality
small supplier network
dependable transportation
manufacturing flexibility
small lot sizes
effective receiving and materials-handling facilities
strong management commitment
The EOQ Inventory ModelTwo costs associated with inventory:
Carrying costs
Ordering costs
Carrying costs increase as inventory levels increase.
However, ordering costs decline as the inventory level
increases.The firm attempts to minimize the total cost.
Total inventory cost = carrying cost + ordering cost
The EOQ Inventory ModelNote that the EOQ model applies to
individual inventory items, not aggregate inventory.
The EOQ Inventory ModelS = annual demand for item in unitsQ

= number of items per order
So, average inventory = Q/2C = carrying cost as proportion of
inventory valueP = price (i.e. cost) per unitThe total annual
carrying cost is then:
TCC = (C)(P)(Q/2)
F = fixed cost to place an orderN = number of orders placed per
yearSo, total annual ordering cost is:
TOC = F(S/Q)
The EOQ Inventory ModelTotal Inventory Cost
TIC = TCC + TOC
= (C)(P)(Q/2) + (F)(S/Q)
So, as the order quantity Q increases, the first term increases,
but the second term decreases.
The EOQ Inventory ModelTo find the cost-minimizing order
quantity, Q*, we apply calculus to the TIC equation:
TIC = (C)(P)(Q/2) + (F)(S/Q)Solving, we find:Q* =
[2FS/(CP)]1/2A consequence of this equation is that Q*
increases with the square root of annual sales, S. So, the firm’s
inventory turnover is assumed to increase as sales increase.
The EOQ Inventory Model
EOQ With Safety StocksSafety stocks are used to:
Meet demand in the event that it is larger than expected.

Meet demand if new orders take longer to receive than
expected.
EOQ With Safety Stocks
EOQ With Safety StocksWith safety stocks, the average
inventory is higher than without them:
Avg. inventory = Q*/2 + safety stock
EOQ With Quantity DiscountsIf the firm’s suppliers offer a
discount for larger orders (larger than Q*), the firm will need to
compare the reduction in purchase price with the additional TIC
from holding a larger than optimal quantity:
Reduction in purchase price
+ TIC discount quantity
– TIC optimal quantity
= net savings from taking the discount
Let Q’ = discount quantity, D = discount percent
Net savings from taking the discount
= (D)(P)(S)
-(Q’ / 2)(C)(P)(1-D) + (F)(S/Q’)
+(Q* / 2)(C)(P)+ (F)(S/Q*)

Managing Accounts Receivable
FIN 340
Prof. David Allen
Managing Account ReceivableThe firm faces a tradeoff between
costs (slow payers and bad debts) and benefits (attracting sales).
Credit PolicyCredit periodLength of time buyers are given to
pay for purchasese.g. net 30Often determined by competitive
situationDiscountse.g. 2/10 net 30Provides an incentive for
customers to pay earlyReduces DSO, and thus the amount of
financing for receivables.
Credit PolicyCredit standardsRequired financial strength
customers need to qualify for credit.Collection policyHow tough
or lax is the firm in trying to collect on slow-paying
accounts?Dunning lettersCollection agency
Setting the Credit Period and StandardsCredit periodOften
determined by competitive situationSetting credit standardsFirm
needs a method to determine likelihood of payment, i.e. credit
quality.an external credit report (D&B, TRW)An internally
generated credit score (similar to Altman Z)Five

C’sCharacterCapacityCapital (net worth)CollateralConditions
Setting the Credit Period and StandardsBusiness credit
information is available
at:https://www.dnb.com/product/birsampl.htmThe D&B
PAYDEX® Score: D&B's unique dollar-weighted numerical
indicator of how a firm paid its bills over the past year, based
on trade experiences reported to D&B by various vendors. The
D&B PAYDEX Score ranges from 1 to 100, with higher scores
indicating better payment performance.
Setting the Credit Period and StandardsKey to the D&B Rating
Setting the Credit Period and StandardsKey to the D&B Rating
Collection PolicyThe firm needs a procedure for dealing with
past due accounts.Dunning lettersCollection agency
Other Factors Influencing Credit PolicyProfit potentialInterest
on past due accounts may be a significant source of profitLegal
considerationsRobinson-Patman Act – makes it illegal to offer
more favorable credit terms to one customer (or class of
customers) than another, unless the differences are cost-
justified.

Basic Objectives:Managing delinquencies: The older an account
becomes, the more difficult it is to collect. So, we need to
manage accounts so that few become delinquent, and to identify
those that will become a problem as early as possible.Managing
credit risk: The goal here is to minimize the company’s losses
on accounts that will not be fully collected. Continued business
with the account is unlikely.Forecasting: As a part of its
ongoing cash budgeting process, the firm needs to forecast the
cash flows from the accounts receivable (AR) portfolio, and to
estimate bad debt losses.
Measuring Accounts Receivable PerformanceIndividual
accounts are monitored for compliance with payments standards
in order to initiate appropriate actions when customers delay
payment beyond agreed upon terms.On the aggregate level,
monitoring is important in setting overall policy guidelines with
respect to risk and return and in forecasting cash flows and bad
debt losses.
Days Sales OutstandingIn our earlier coverage of ratio analysis,
we used the “days sales outstanding” (DSO, also known as
average collection period or average age of receivables) to
measure the average length of time it takes to collect accounts
receivable. It can be shown that the DSO is biased when the
firm’s sales are seasonal or cyclical in nature.
Days Sales OutstandingDSO = accounts receivable / average
daily salesSo, for annual data,

DSO = accounts receivable / (annual sales / 365)
If we are measuring DSO before year-end, we need to adjust the
equation as follows:
DSOsub-period =
accounts receivable / (sub-period sales / days in sub-period)
For example, if we measure DSO at the end of each quarter,
then:DSOquarterly = accounts receivable / (quarterly sales /
91)where 91 = approx. number of days in one quarter
Aging ScheduleThe aging schedule is one of the primary tools
used to measure accounts receivable performance.It shows
accounts receivable in dollar or percentage terms, as a function
of age of invoice and month of sale.
DSO and Aging Schedule - AssumptionsIn this example, we
assume that customer payment behavior is constant, and sales
are flat.
DSO and Aging Schedule - Flat Sales
DSO and Aging Schedule - Flat Sales
DSO and Aging Schedule - Flat SalesHere we are assuming that
customers do not change their payment behavior over time. The
percentages paid each month, relative to the sale date, do not

vary.Note that in every case the DSO is the same, regardless of
the month, or whether we used quarterly sales or year-to-date
sales figures.
DSO and Aging Schedule - AssumptionsIn this example, we
assume that customer payment behavior is constant, and sales
are seasonal.
DSO and Aging Schedule - Seasonal Sales
DSO and Aging Schedule - Seasonal Sales
DSO and Aging Schedule - Seasonal SalesNote that DSO is
changing over time, even though the customers’ payment
behavior is not.So, DSO cannot be used to accurately monitor
receivables if the firm’s sales are seasonal or cyclical.
DSO and Aging Schedule - Seasonal SalesSo, as sales increase,
the DSO is an upwards biased measure of the true payment
behavior of the firm’s customers (i.e. DSO overestimates
collection time).Likewise, as sales decrease, the DSO is a
downwards biased measure of the true payment behavior of the
firm’s customers (i.e. DSO underestimates collection time).

Payment Patterns Approach to Monitoring ARIn the previous
section, we showed that the DSO measure is biased when sales
are changing over the measurement period, even if our
customers do not change their payment behaviors. We will now
introduce a technique know as the “payments pattern approach”
that allows us to more accurately determine trends in the
payment behavior of our customers.
Payment Patterns Approach to Monitoring ARIn the example
below, we do not make the assumption that we know the
payment behavior of our customers. Instead, we let the data tell
us what is happening. The table below reports the credit sales
by month and the collections received for that month’s sales.
Payment Patterns Approach to Monitoring ARNext, we subtract
the amount received from the sales to determine the remaining
balance by month:
Payment Patterns Approach to Monitoring ARDivide each figure
by the sales for that month to convert to percentages:
Payment Patterns Approach to Monitoring ARThen, measure the
time as months since the sale, rather than by the name of the
month:
Payment Patterns Approach to Monitoring ARBy examining

either table above, we can see that the firm’s customers pay
slowly in the Oct - Dec quarter, and most quickly in the Apr –
Jun quarter.
Payment Patterns Approach to Monitoring ARThe Payment
Patterns Approach shows the percentage of credit sales in each
period (usually a month) that are outstanding at the end of each
subsequent period. It is not subject to bias when sales are
seasonal, and is useful for projecting receivables and collections
in preparing a cash budget.
Managing Credit RiskTypically, the most important element is
controlling the risk of non-payment. In international trade,
there is also foreign exchange risk and country risk.
Guarantees and Letters of CreditA guarantee may be obtained is
situations where the buyer’s credit quality is insufficient. The
guarantee may be from the firm’s parent, or some type of
government agency that has a stake in the buyer’s success.A
letter of credit is an obligation of a bank to remit funds when
clearly pre-specified terms and conditions are met. It is issued
by the buyer’s bank, and facilitates trade when the seller is
located in another country.
Credit Insurance And FactoringCredit InsuranceThe selling firm
submits a list of buyers, and typical amounts outstanding to the
credit insurer. The insurer replies with a maximum insurable
amount for each buyer and a price for the policy.The agreement

also details the deductible amount and coinsurance of credit
losses above a predetermined level. If an invoice becomes past
due by more than a preset number of days, it is submitted to the
insurer, who pays the face value to the seller (less deductibles
and coinsurance). The insurer is then responsible for collecting
the account.
Credit Insurance And FactoringCredit insurance is often used by
small to medium sized firms that are uncomfortable with their
credit exposure to a number of large buyers.For the process to
be economically feasible, the credit insurer must be superior in
evaluating credit risk, and or have some diversification or
economies of scale.European companies use credit insurance
much more than those in the U.S., in large part due to the lack
of available credit information.
FactoringInvolves the sale or transfer of title of accounts
receivable to a factoring company, which is usually a subsidiary
of a financial services company or bank.The factor provides the
credit and collection functions.Options:With or without
recourse: With recourse means the seller is liable if the factor
cannot collect on an account. Most factoring is without
recourse.With or without notification: With notification means
that the buyer knows that its account has been factored and is
required to remit directly to the factor. Most factoring is on a
notification basis.
FactoringMaturity or discount factoring: With maturity
factoring, funds are available to the seller on the average
collection date. With discount factoring, funds are remitted to

the seller sooner than the average collection date. Most users
choose discount factoring to speed up cash receipts.Pricing:
usually a fixed percentage (about 1%) of the invoice is the
commission. With discount factoring, the interest rate is often
the prime rate plus 2% or 3%. In addition, there is also a
reserve of about 3% to 5% for returns, disputes, etc.
FactoringAdvantages:Having the factor perform the credit and
collection function is very useful for companies without
expertise in this area.Small companies are often not well
diversified in their receivables exposure. Factoring mitigates
this exposure.For firms with highly seasonal sales, the ability to
accelerate cash flows is very beneficial.The factor performs a
useful accounting function for the selling firm.
FactoringDisadvantages:Factoring can be much more expensive
for the seller than bank borrowing or credit insurance.Since the
factor controls the credit and collection function, the seller may
lose the ability to enhance revenues through adopting more
lenient credit and collection procedures.Since the factor will not
accept all credits, or may place a limit on its exposure to certain
buyers, the seller is still stuck with performing the credit and
collection function on some of its customers.
Collections PolicyIssues:Promptness: Delinquent accounts tend
to perform much worst if not attended to properly.Cost/benefits:
Certain accounts may not respond to a particular form of
collection procedure. It is important to understand which
procedures make economic sense at a given stage in the
collection process.

Collections PolicyInternal StrategiesIt is important at an early
stage to distinguish those accounts that are actually delinquent
from those delays that are caused by some dispute over the
merchandise being invoiced.It is prudent for the credit grantor
to confirm in writing that the goods as ordered were in fact
received before initiating collections efforts.Most companies
begin with relatively mild reminders so as not to agitate
customers that are, in the longer-term, profitable. As the
delinquency increases, the long-term revenue potential of the
customer diminishes.
Collections PolicyExternal StrategiesCollection AgenciesThe
usual agency charges 30-50% of the collected amount as its fee.
If the seller has an ongoing relationship with the collection
agency, the charges may be based on the historical recovery
rate.Adjustment BureausUsually organized by a given industry
group to aid its members in the collection of bad debts.
Analyzing Proposed Changes in Credit PolicyThe cost to
finance (carry) the additional receivables is:(DSO)(Sales per
day)(variable cost ratio)(cost of funds)
Analyzing Proposed Changes in Credit PolicyWahoo Corp. sells
to its customers on terms on net 30. It is considering relaxing
its credit terms to 2/10 net 30 in order to attract more sales.In
addition, the firm will reduce its spending on credit analysis
and collection.The firm's marketing department believes that

this change in policy will result in a 5% increase in gross sales.
Under the current policy, 70% of customers pay in 30
days.Under the current policy, 30% of customers pay in 50
days, or 20 days late.
Under the proposed policy, 20% of customers are expected to
take the offered discount, and pay in 10 days.Under the
proposed policy, 60% of customers are expected to forego the
discount, and pay in 30 days.Under the proposed policy, 20% of
customers are expected to forego the discount, and pay in 50
days, or 20 days late.
Under the currrent policy, the firm spends $5,000 per year on
credit analysis and collection efforts.Under the proposed policy,
the firm expects to reduce spending to $3,000 per year on
credit analysis and collection efforts.
Complete the spreadsheet below to determine the effect on the
firm's profitability of the proposed change.
Analyzing Proposed Changes in Credit Policy
Analyzing Proposed Changes in Credit PolicyProfits increase
under the proposed system, so the firm would adopt it.
SALES DATA AND PAYMENT BEHAVIOR
% of sales paid in month of sale50%
% of sales paid 1 month after sale30%
% of sales paid 2 months after sale20%
Amounts still outstanding
Month
Monthly
Sales
At end of month1 month later2 months later
November100$ 50$ 20$ -$
December100$ 50$ 20$ -$

January100$ 50$ 20$ -$
February100$ 50$ 20$ -$
March100$ 50$ 20$ -$
April100$ 50$ 20$ -$
May100$ 50$ 20$ -$
June100$ 50$ 20$ -$
July100$ 50$ 20$ -$
August100$ 50$ 20$ -$
September100$ 50$ 20$ -$
October100$ 50$ 20$ -$
November100$ 50$ 20$ -$
December100$ 50$ 20$ -$
AGING SCHEDULE - DOLLARS
Month
Accounts
Receivable
at Month End
Amount current
at month end
Amount past
due 1 to 30 days
at month end
January70$ 50$ 20$
February70$ 50$ 20$
March70$ 50$ 20$
April70$ 50$ 20$
May70$ 50$ 20$
June70$ 50$ 20$
July70$ 50$ 20$
August70$ 50$ 20$
September70$ 50$ 20$
October70$ 50$ 20$
November70$ 50$ 20$
December70$ 50$ 20$
AGING SCHEDULE - PERCENT
Month

Accounts
Receivable
at Month End
Percent current
at month end
Percent past
due 1 to 30 days
at month end
January70$ 71.4%28.6%
February70$ 71.4%28.6%
March70$ 71.4%28.6%
April70$ 71.4%28.6%
May70$ 71.4%28.6%
June70$ 71.4%28.6%
July70$ 71.4%28.6%
August70$ 71.4%28.6%
September70$ 71.4%28.6%
October70$ 71.4%28.6%
November70$ 71.4%28.6%
December70$ 71.4%28.6%
DSO CALCULATIONS
Based on Quarterly Sales Data
Based on Year-to-Date
Sales Data
Month
Monthly
Sales
Receivables
Outstanding At
End of Month
ADS = quarterly
sales / 91DSOADSDSO
January100$ 70$
February100$ 70$
March100$ 70$ 3.30$ 21.2
days3.30$ 21.2 days

April100$ 70$
May100$ 70$
June100$ 70$ 3.30$ 21.2
days3.30$ 21.2 days
July100$ 70$
August100$ 70$
September100$ 70$ 3.30$ 21.2
days3.30$ 21.2 days
October100$ 70$
November100$ 70$
December100$ 70$ 3.30$ 21.2
days3.30$ 21.2 days
SALES DATA AND PAYMENT BEHAVIOR
% of sales paid in month of sale50%
% of sales paid 1 month after sale30%
% of sales paid 2 months after sale20%
Amounts still outstanding
Month
Monthly
Sales
At end of
month
1 month
later
2 months
later
November100$ 50$ 20$ -$
December100$ 50$ 20$ -$
January100$ 50$ 20$ -$
February120$ 60$ 24$ -$
March140$ 70$ 28$ -$
April120$ 60$ 24$ -$
May100$ 50$ 20$ -$
June80$ 40$ 16$ -$
July100$ 50$ 20$ -$
August100$ 50$ 20$ -$

September100$ 50$ 20$ -$
October150$ 75$ 30$ -$
November150$ 75$ 30$ -$
December150$ 75$ 30$ -$
AGING SCHEDULE - DOLLARS
Month
Accounts
Receivable
at Month End
Amount
current at
month end
Amount
past due 1
to 30 days
at month
end
January70$ 50$ 20$
February80$ 60$ 20$
March94$ 70$ 24$
April88$ 60$ 28$
May74$ 50$ 24$
June60$ 40$ 20$
July66$ 50$ 16$
August70$ 50$ 20$
September70$ 50$ 20$
October95$ 75$ 20$
November105$ 75$ 30$
December105$ 75$ 30$
AGING SCHEDULE - PERCENT
Month
Accounts
Receivable
at Month End
Percent
current at

month end
Percent
past due 1
to 30 days
at month
end
January70$ 71.4%28.6%
February80$ 75.0%25.0%
March94$ 74.5%25.5%
April88$ 68.2%31.8%
May74$ 67.6%32.4%
June60$ 66.7%33.3%
July66$ 75.8%24.2%
August70$ 71.4%28.6%
September70$ 71.4%28.6%
October95$ 78.9%21.1%
November105$ 71.4%28.6%
December105$ 71.4%28.6%
DSO CALCULATION
Based on Quarterly
Sales Data
Based on Year-to-Date
Sales Data
Month
Monthly
Sales
Receivables
Outstanding
At End of
Month
ADS =
quarterly
sales / 91DSOADSDSO
January100$ 50$
February120$ 80$
March140$ 94$ 3.96$ 23.8 days3.96$

23.8 days
April120$ 88$
May100$ 74$
June80$ 60$ 3.30$ 18.2 days3.63$
16.5 days
July100$ 66$
August100$ 70$
September100$ 70$ 3.30$ 21.2 days3.52$
19.9 days
October150$ 95$
November150$ 105$
December150$ 105$ 4.95$ 21.2 days3.87$
27.1 days
Amount Collected in Month
Month
Credit
Sales
OctNovDecJanFebMarAprMayJunJulAugSepOctNovDecJanFeb
Mar
Oct1,000 300 300 200 200
Nov1,000 300 300 200 200
Dec1,000 300 300 200 200
Jan1,200 480 420 240 60
Feb1,400 560 490 280 70
Mar1,600 640 560 320 80
Apr1,600 800 560 240 -
May1,600 800 560 240 -
Jun1,600 800 560 240 -
Jul1,400 630 420 210 140
Aug1,200 540 360 180 120
Sep1,000 450 300 150 100
Oct1,200 360 360 240 240
Nov1,200 360 360 240 240
Dec1,200 360 360 240 240
Amount Still Outstanding at End of Month
Month

Credit
Sales
Mar
Oct1,000 700 400 200 -
Nov1,000 700 400 200 -
Dec1,000 700 400 200 -
Jan1,200 720 300 60 -
Feb1,400 840 350 70 -
Mar1,600 960 400 80 -
Apr1,600 800 240 - -
May1,600 800 240 - -
Jun1,600 800 240 - -
Jul1,400 770 350 140 -
Aug1,200 660 300 120 -
Sep1,000 550 250 100 -
Oct1,200 840 480 240 -
Nov1,200 840 480 240 -
Dec1,200 840 480 240 -
Amount Still Outstanding at End of Month
Month
Credit
Sales
Mar
Oct1,000 70%40%20%0%
Nov1,000 70%40%20%0%
Dec1,000 70%40%20%0%
Jan1,200 60%25%5%0%
Feb1,400 60%25%5%0%
Mar1,600 60%25%5%0%
Apr1,600 50%15%0%0%
May1,600 50%15%0%0%
Jun1,600 50%15%0%0%
Jul1,400 55%25%10%0%
Aug1,200 55%25%10%0%

Sep1,000 55%25%10%0%
Oct1,200 70%40%20%0%
Nov1,200 70%40%20%0%
Dec1,200 70%40%20%0%
Amount Outstanding at End of Month
Month
Credit
Sales
Month of
Sale
1 Month
After
Sale
2 Months
After
Sale
3 Months
After
Sale
Oct1,000 70%40%20%0%
Nov1,000 70%40%20%0%
Dec1,000 70%40%20%0%
Jan1,200 60%25%5%0%
Feb1,400 60%25%5%0%
Mar1,600 60%25%5%0%
Apr1,600 50%15%0%0%
May1,600 50%15%0%0%
Jun1,600 50%15%0%0%
Jul1,400 55%25%10%0%
Aug1,200 55%25%10%0%
Sep1,000 55%25%10%0%
Oct1,200 70%40%20%0%
Nov1,200 70%40%20%0%
Dec1,200 70%40%20%0%
Avg. still outstanding61%29%11%0%
Amount Collected by Month

Month
Credit
Sales
Month of
Sale
1 Month
After
Sale
2 Months
After
Sale
3 Months
After
Sale
Oct1,000 30%30%20%20%
Nov1,000 30%30%20%20%
Dec1,000 30%30%20%20%
Jan1,200 40%35%20%5%
Feb1,400 40%35%20%5%
Mar1,600 40%35%20%5%
Apr1,600 50%35%15%0%
May1,600 50%35%15%0%
Jun1,600 50%35%15%0%
Jul1,400 45%30%15%10%
Aug1,200 45%30%15%10%
Sep1,000 45%30%15%10%
Oct1,200 30%30%20%20%
Nov1,200 30%30%20%20%
Dec1,200 30%30%20%20%
Avg. collected39%32%18%11%
Inputs:
Current
Policy
Proposed
Policy
Annual sales365,000$ 383,250$

Variable cost ratio65%65%
Cost of funds (financing cost)12%12%
Discount for early payment0%2%
Early payment period10 days
Percent of customers taking discount20%
Full amount due in30 30 days
Percent of customers paying full amount on time70%60%
Age of invoices for customers paying late50 50
days
Percent of customers paying late30%20%
Days per year365 365
Annual credit analysis and collection expense5,000$
3,000$
Bad debt losses as percent of gross sales3%2%
Income tax rate30%30%
Outputs:
Current
Policy
Proposed
Policy
Days sales outstanding 36.00 30.00
Gross sales365,000 383,250
Less discounts- 1,533
= Net sales365,000 381,717
Less variable production costs237,250 249,113
= Profit before credit cost and taxes127,750 132,605
Less credit related costs:
Cost of carrying receivables2,808 2,457
Credit analysis and collection expenses5,000 3,000
Bad debt losses10,950 7,665
=Profit before taxes108,992 119,483
Less taxes32,698 35,845
=Net income76,294 83,638
Change in net income7,343

Cash and Marketable Securities Management
The Need for CashFirms hold cash for at least three
reasons:Transactions balance: The firm’s day-to-day operations
require cash for wages, inventories, rent, utilities,
etc.Precautionary balance: If the forecast of cash inflows and
outflows used to create the cash budget proves to be wrong, the
firm needs a safety stock of cash.Speculative motive: The firm
may hold extra cash in order to quickly take advantage of
opportunities that may come along.
http://www.zacks.com/research/report.php?type=abs&t=MSFT
The Need for CashIn addition, firms may hold cash
because:They have a bank loan outstanding that requires a
compensating (minimum) cash balance. This requirement helps
ensure that the firm always has some minimum level of liquidity
to meet its day-to-day needs.They need a temporary “parking
place” for the proceeds of a long-term debt issue. These
proceeds may be used later to build a new factory, for example.
The Need for CashDisadvantages of holding cash:Cash earns a
low rate of return, which reduces potential profitability.Since
cash is an asset on the left-hand side of the balance sheet, there
must be a corresponding source of financing on the right-hand
side, with an associated cost of capital that likely exceeds the
return earned by the cash.

The Need for CashRecall in the cash budget that we assumed a
target cash balance for the firm. Some cash budgets also use a
minimum and maximum cash balance, in addition to a target in
between. Where do these numbers come from?Subjective
estimates from management, based on experience.Quantitative
models such as Baumol, or Miller-Orr, to be examined
later.Bank required compensating balances.
The TradeoffIn a typical cash management model, firms are
usually assumed to hold cash (which earns no interest) and
marketable securities (interest bearing, short-term securities) to
meet their payment needs. To move funds between the two, a
transaction costs must be incurred. The transaction cost
includes direct costs such as a brokerage fee to sell a security,
as well as indirect costs such as administrative time and effort.
The TradeoffIf the firm holds a large cash balance, it incurs an
opportunity cost (i.e. loses interest that could be earned on
marketable securities). However, the large cash balance results
in less frequent liquidations (sales) of marketable securities,
which lowers the firm’s transactions costs.If the firm holds a
small cash balance, the firm earns more interest on marketable
securities. However, a small cash balance results in more
frequent liquidations of marketable securities, which raises the
firm’s transactions costs.
The TradeoffSo, the firm must strike a balance between

transactions costs and opportunity costs (i.e. between cash and
marketable securities). It seeks to find the cash balance at
which the sum of these two costs is minimized.
Characteristics of Marketable SecuritiesMarketable securities
are by definition those that can be resold from one investor to
another in a “secondary” market. While many securities fit this
general definition, in the area of cash management there are
several characteristics that are considered of primary
importance. Perhaps the most important is safety of principal,
followed closely by liquidity. Firms that invest excess cash on
a temporary basis want to be assured that the full amount of
original principal will be available at a later date when needed
for some other purpose. Liquidity is needed to ensure that the
funds are available immediately when the need presents itself.
Characteristics of Marketable SecuritiesWhen choosing among
alternative marketable securities, the cash manager must make
tradeoffs that affect the rate of return earned. These tradeoffs
include:More or less quality: There is a direct relationship
between the rate of return that is promised on marketable
securities, and the likelihood of default. Safer securities
promise lower returns, and risky securities promise higher
returns. Note, however, that “promised” returns and “realized”
returns can be different. Riskier securities may default, leaving
the investor with little or no
return.http://www.ambest.com/ratings/methodology/commercial
paper.pdfhttp://www.dbrs.com/about/ratingScaleshttp://www.rb
cpa.com/Moody%27s_ratings_and_definitions.pdf

Characteristics of Marketable SecuritiesMore or less quality
(cont’d)The safest securities are those backed by the U.S.
government. Examples include Treasury bills, notes, and bonds,
and bank Certificates of Deposit. Riskier securities include
corporate securities, such as commercial paper, notes, and
bonds.
Characteristics of Marketable SecuritiesMore or less liquidity:
Liquidity refers the ability to quickly sell a security at its true
value. The degree of liquidity of an asset is largely a function
of how many buyers are available, and how well developed is
the secondary market for the asset. Some assets, such as U.S.
Treasury bills, are very liquid. Others, such as real estate, are
much less liquid.
Since lack of liquidity is a source of risk, less liquid
investments tend to promise higher returns, all else the same.
Characteristics of Marketable SecuritiesMore or less time to
maturity: If a firm ties its excess money up for a long period of
time in a securities investment, then it faces the risk of not
being able to use the money for some other opportunity that
may come along. This implies that long-term investments are
riskier than short-term investments. Note that this type of risk
is not the same as default (quality) risk.In general, for a given
level of default risk, long-term investments promise a higher
rate of return than short-term investments.
http://bonds.yahoo.com/rates.html
The Baumol ModelBaumol developed a model of cash

management that recognizes the tradeoff between foregone
interest (from holding too much cash in non-interest bearing
accounts) and transactions costs (from liquidating marketable
securities). He did this by applying an existing inventory
management model (Economic Order Quantitiy, EOQ) to cash
balances.The Baumol model makes a number of simplifying
assumptions (inherited from the EOQ model):The firm’s annual
demand for cash is known (perhaps derived from the cash
budget), and constant over time.The cost to move funds from
the marketable securities account to the cash account in fixed,
i.e. independent of the amount transferred.
The Baumol ModelNote that these assumptions are often
violated in practice. As a result, the model’s main attractions
are its ease of application and straightforward portrayal of the
foregone interest (i.e. holding cost) versus transaction cost
tradeoff.The firm begins with its optimal cash balance (to be
determined by the model), which is then used up until it runs
out of funds. At that time the firm again liquidates marketable
securities to return its cash balance to its original value.
Baumol Model Cash Balances
The Baumol ModelThe total costs of a given starting cash
balance, C, is given by:total costs = holding costs + transactions
costs
= (C/2)k + (T/C)Fwhere:C = cash raised by selling marketable
securities or borrowing (i.e. the beginning cash balance)F =
fixed transaction cost of moving cash to/from mkt. sec.T = total

annual cash needsk = opportunity cost of holding cash (return
on marketable securities)
The Baumol ModelThe goal is to find the value for C (amount
transferred from marketable securities to the cash account) that
minimizes total costs:
The Baumol ModelMinimizing the total cost, with respect to C
results in:
The firm liquidates (or borrows) C* each time its cash balance
hits zero.
ExampleA firm has annual cash needs of T = $360,000. The
cost to transfer funds from its marketable securities account to
its cash account is F = $30. The opportunity cost of cash (i.e.
the rate of interest it loses by not leaving the funds in its
marketable securities account is k = 5%.
Example (cont’d)To minimize the total cost of its cash holdings,
the firm should transfer cash from its marketable securities
account to its cash account in the amount:

Note that in practice, the firm may find it beneficial to round
the amount to the nearest $1,000.The total annual cost of its
cash holdings would be:TC = (C/2)k + (T/C)F = (20,785/2).05 +
(360,000/20,785)30 = $1,039(Note: these values correspond to
the charts presented above).
The Miller-Orr ModelMiller and Orr developed a model that
attempts to overcome some of the shortcomings of the Baumol
model. They assume that the firm’s daily cash flow is random.
It may increase or decrease on any given day. They set an
upper and lower limit on the firm’s cash balance. If the balance
hits the lower limit, the firm needs cash and will liquidate
marketable securities. If the balance hits the upper limit, the
firm has excess cash, and will invest the excess in marketable
securities. In either case, the firm will transfer funds in an
amount that returns its cash balance to a target level.
The Miller-Orr ModelH = upper limitZ = target cash balanceL =
lower limit, set by firm’s management s2 = variance of daily
cash flowk = daily opportunity cost (= annual rate / 365)F =
fixed transaction costThe target balance (Z) and upper limit (H)
are:Z = [3F s2 /4k]1/3 + LH = 3[3F s2 /4k]1/3 + L = 3Z - 2L
ExampleA firm wants to determine the optimal range for its
cash balance. Its management has decided that the firm needs
at least $10,000 cash on hand each day in order to meet its daily
cash needs (L = $10,000). The firm has recorded its daily cash
flows over the past year, and will use them to estimate the
variance of daily cash flows:

The Miller-Orr ModelThe variance was calculated using the
=var(first cell : last cell) function in Excel.Using the Miller-Orr
model, the firm has determined its target cash balance (Z), and
upper limit (H):
The Miller-Orr ModelWhenever its cash balance falls below
$10,000, it will liquidate enough marketable securities to bring
the cash balance back up to $16,997.21.Whenever its cash
balance rises above $30,991.63, it will purchase enough
marketable securities to bring the cash balance back down to
$16,997.21.A typical cash balance over a year might look like
this:
Marketable Securities ManagementIf firms are going to use
marketable securities as a temporary storage place for excess
cash balances, then the firm should establish written investment
objectives and guidelines. These help to ensure that the cash
manager’s actions are within permissible bounds.

Developing Investment ObjectivesWritten investment objectives
are needed in order to judge the appropriateness of any specific
marketable security.They also helps demonstrate to senior
management that the cash manager is carrying out his/her duties
with due diligence.
Developing Investment ObjectivesA given investment is not
inherently good or bad. Instead, each involves a particular
tradeoff between:More or less liquidity.More of less
quality.More or less time to maturity.Without written
objectives, it is hard to know which side of a given tradeoff to
emphasize.
Factors Influencing Investment ObjectivesCash management
decisions should not constrain operational decisions. Normally,
it should be the other way around.Cash investment management
objectives should reflect the firm’s business plan. That is, the
firm should build a cash budget first, then a set of investment
objectives to fit the plan. Sensitivity analysis can help set
boundaries for the investment objectives.
Factors Influencing Investment ObjectivesOther issues that can
affect investment objectives:Regulatory
requirements.Alternative sources for satisfying unexpected cash
needs.The probability of unexpected cash needs.Plans for
business acquisition or internal capacity expansion.

Factors Influencing Investment ObjectivesTax status - has a
major impact on investment objectivesThe firm needs to know
its marginal tax rate in order to compare yields on taxable and
tax-exempt investments.The firm must compare the after-tax
return from alternative investments:Returnafter-tax =
Returnbefore-tax(1 – firm’s marginal tax rate)
Taxation of Interest IncomeThe marginal tax rate is the tax rate
for the next dollar of income. It varies by type of investment,
and is the sum of the applicable federal and state tax rates.
Issuer
Federal Tax on interest income
State Tax on interest income
U.S. Treasury
Yes
No
Municipal government
No
No
Corporation
Yes
Yes

The Role of Investment ManagementIs the portfolio being
viewed as a profit center?Recall that the principal purpose is to
provide a safe, temporary parking place for excess funds.Is
management relying on the return to meet earnings
goals?Shareholders might question why the firm is using its
investment portfolio, rather than its operations, to meet earnings
goals.
The Role of Investment ManagementIf management emphasizes
a preset level of returns, then the portfolio manager might
engage in activities that are sub-optimal, such as:Using
maturities longer than the anticipated storage period.Using
lower quality issues.Using less liquid issues.If the portfolio
manager’s compensation is tied to the return realized, then a
higher risk strategy is likely to result.
How Objectives Are ExpressedQualitative objectives provide
guidance.Some examples:To ensure the availability of cash on a
schedule consistent with the firm’s cash flow forecast.To
maintain complete portfolio liquidity at all times.To hold only
highly rated issues.To invest primarily in tax-exempt (or
taxable, depending on the marginal tax rate) issues.
How Objectives Are ExpressedIf quantitative returns are
specified, they should be relative to a benchmark rather than in

absolute terms, e.g. 50 basis points above the average yield on 3
month t-bills during the period.(Note: 100 basis points = 1%, so
50 basis points = 0.5%)Other components of objectives:Are
targets to be met absolutely, or worked towards?What is the
time horizon for accomplishing and evaluating the goals?
Investment GuidelinesSpell out specific parameters that will
guide and restrict the latitude of the portfolio manager.For each
purchase of marketable securities, they specify:Maximum
maturity.Maximum average maturity over all
investments.Minimum quality standards.Tax
considerations.Prohibited assets.Diversification standards.
Management Controls and ReportingProcedures are needed to
monitor the marketable securities investment process.The firm
needs to specify responsibilities, the chain of reporting, and the
division of duties.A monthly report should detail: positions,
market value, original cost, and expected cash flow.A quarterly
report should give a comparison of actual performance relative
to objectives.
-
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
1
7
13
19
25
31

37
43
49
55
61
67
73
79
85
Day
Cash Balance
-
500.00
1,000.00
1,500.00
2,000.00
2,500.00
-
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
Cash Transferred
Costs
Holding Costs
Transactions Costs
Total Costs
k
)T)(F(2
C
*

785,20$
.05
)000,360)(30(2
C
*
Inputs:
L$10,000.00
2
2,085,784.83
k5%
F$30.00
Outputs:
Z$16,997.21
H$30,991.63
0
5000
10000
15000
20000
25000
30000
35000
0
100
200
300
400
Day
Cash Balance

Working Capital Management
FIN 340
Northern Arizona University
The Basic QuestionsWhat is the appropriate amount of current
assets to carry, both in total and specific accounts?How should
current assets be financed?These two questions constitute the
firm’s working capital policy.
TerminologyWorking capital is defined as current assets.Net
working capital is current asset minus current liabilities.The
typical financial managers spends the majority of his/her time
on working capital issues, rather than on long-term issues such
as capital budgeting, capital structure, and dividend policy.
Additional TerminologyNet operating working capital (NOWC)
=operating current assets – operating current liabilities
=cash + receivables + inventories – payables – accrualsWorking
capital management
The process of setting the working capital policy, and
implementing it on a day-to-day basis.
Alternative Net Operating Working Capital PoliciesBasic issue:
How much current assets are needed to support the anticipated

sales?
Alternative Current Asset PoliciesBasic issue: How much
current assets are needed to support the anticipated sales?
Alternative Current Asset PoliciesUnder conditions of certainty
in sales, manufacturing time, and collections, firms would hold
the least possible amount of current assets.Why?
All assets must be financed, and financing costs money,
reducing profitability at any given level of sales.
Alternative Current Asset PoliciesUnder conditions of
uncertainty in sales, manufacturing time, and collections, firms
would hold more than the minimum possible amount of current
assets.Why?
Safety stocks are needed to meet unanticipated variations in
demand and manufacturing time.
Alternative Current Asset PoliciesThere is a risk-return tradeoff
in determining the amount of current assets to hold:
Fewer current assets reduces financing costs, and so increases
profits, but…
It increases the probability of losing sales due to stock outs
and/or a restrictive credit policy.So, the firm has a balancing act
to perform between profitability and risk.

Alternative Short-Term Financing PoliciesNet operating
working capital = NOWC= operating current assets – operating
current liabilities=(cash + receivables + inventories) –
(payables + accruals)Virtually all firms experience changes in
NOWC due to:
Seasonality in sales, or
Cyclicality in the economyNOWC has two components:
A permanent level, i.e. the minimum amount the firm always
has, and
A temporary level which varies with seasonality and
cyclicality.How the firm finances these components is known as
the firm’s short-term financing policy.
Maturity Matching ApproachThe firm attempts to match the
maturity of the financing with the expected life of the asset
being financed.
Aggressive ApproachFinance all fixed assets and a portion of
permanent NOWC with long-term capital. Finance the
remaining portion of permanent NOWC and all temporary NWC
with short-term debt (which tends to be less expensive, thereby
increasing profits).
Conservative ApproachFinance all fixed assets, all permanent
NOWC, and a portion of temporary NOWC with long-term
capital. At times, the firm has more financing than needed, and
“stores” the excess in marketable securities. Safer, but less
profitable.

Short-Term FinancingAdvantages of short-term financing
Short-term loans can be obtained much faster than long-term
credit.
If the financing need is seasonal, the firm may not want long-
term funds since:
Floatation (issuance) costs are higher for long-term debt.
Long-term loans sometimes contain prepayment penalties.
Long-term loans always contain “restrictive covenants.”
The yield curve is normally upward sloping, i.e. long-term
interest rates are higher than short-term interest rates.
Short-Term FinancingDisadvantages of short-term financing
Short-term credit is more risky because:
Loans must be refinanced (rolled over) more often, and the rate
on the new loan could increase substantially.
The lender may be unwilling to renew the loan if the firm’s
financial condition has weakened or if the credit markets have
become tighter.
Cash Conversion CycleIn a typical manufacturing firm, the
cycle goes something like this:
The firm buys raw materials from its suppliers on credit, then
applies labor (accrued wages) to convert it into the finished
product.
The finished product is sold to customers on credit.
The firm pays its suppliers and employees.
The firm receives payment from its customers.So, cash is paid
out before inflows are realized.

Cash Conversion CycleInventory conversion period
= inventory / (COGS / 365)
Many published sources use sales in place of COGS.Receivables
collection period = receivables / (annual sales / 365)Payables
deferral period = payables / (COGS / 365)
Cash Conversion CycleCash conversion cycle =
inventory conversion period
+ receivables collection period
– payables deferral periodMeasures the number of days between
paying out cash to suppliers and employees, and receiving cash
from customers.The longer the CCC, the greater the amount of
outside financing the firm will need. This increases financing
costs and reduces profitability.Financing needed for purchases =
CCC * (COGS/365)
Shortening the CCCGoal is to reduce the CCC as much as
possible without hurting operations or alienating customers
and/or suppliers.
Reduce inventory conversion period by processing and selling
goods more quickly.
Reduce receivables collection period by speeding up
collections.
Lengthen the payables deferral period by slowing down the
firm’s own payments to suppliers.
Current Asset Strategies
0
50

100
150
200
250
300
350
400
0
200
400
600
800
1000
1200
Sales
Current Assets
Relaxed
Moderate
Restricted
Current Assets
Turnover
To Support
of Current
$1000 in Sales
Assets
Relaxed
353
2.8
Moderate
220
4.5
Restricted
163
6.1
1. A firm currently currently purchases the Economic Order

Quantity (Q*) of a particular item from its supplier. The
supplier is offering a 3% discount if the firm will buy in lots of
1,000 instead.
The firm expects to sell 5,000 units of the item per year. It's
cost is $50 per unit and the cost to place an order is about $20
per order. The annual carrying costs are 30% of the inventory
value.
Calculate the firm's net savings from taking the discount.
Enter your result rounded to the nearest integer. Do not include
a dollar sign.
Net savings from taking the discount = Reduction in purchase
price - TIC discount quantity + TIC optimal quantity
2. A firm uses the EOQ model to determine its optimal reorder
quantity.The firm sells 93,910 units per year, and there is a 9
day lag between ordering and receiving new inventory.What is
the order point (also known as reorder point)?Assume a 365 day
year, round to the nearest integer, enter with no punctuation.
3. 3. Refer to the firm's financial statements. If the firm adopts
a more stringent collections policy, it expects to reduce DSO to
28 days, without having a significant effect on sales. What will
be the firms average accounts receivable balance under the new
policy?
Round your result to the nearest integer, and enter it with no
punctuation of any kind.
DSO = accounts receivable / (annual credit sales / 365)
Assume all sales are credit sales.
Answer: 3,500
A firm buys inventory from suppliers that offer terms of 4/17
net 35. The firm does not currently take the offered discount.
What is the "nominal annual cost" to the firm of not taking the
discount?

Enter your result rounded to the nearest integer %. Assume a
365 day year.
Answer
Please me yours! If different!
a.
Continue to pay on day 30.
b.
Borrow from the bank and pay on day 30.
c.
Borrow from the bank and pay on day 10 to get the discount.
4. Unlike the Baumol model, the Miller-Orr model of cash
management assumes that the firm's net cash flows are known
and constant
False or true
5. A firm has marginal tax rates as follows:
Federal tax rate
31%
State tax rate
5%
The firm in considering purchasing a corporate commercial
paper issue with a before-tax return of 7% for its marketable
securities portfolio. Calculate the after-tax return for the
commercial paper.
6. Relative to short-term debt, the use of long-term debt usually
results in __________.
Check all that are correct.
Answer
a.

Lower interest costs
b.
Higher interest costs
c.
Lower profitability
d.
Higher profitability
e.
Lower risk
f.
Higher risk
Check all of the following that are correct for a firm that holds
safety stocks (above the EOQ optimal quantity).
Answer
a.
Carrying costs are higher.
b.
Transactions costs are higher.
c.
Total inventory costs (TIC) is higher.
d.
The time period between reorders decreases.
A firm sells $360,000 of goods per year on credit, on terms of
2/15 net 35. If 39% of customers take the discount and pay in

15 days, and the remainder pay the full invoice amount in 35
days, what is the firm's DSO (day's sales outstanding)?
Round your result to the nearest integer
7. Which of the following it not a typical characteristic of
marketable securities?
Answer
a.
High rate of return
b.
Safe from default risk
c.
Highly liquid
d.
Short-term to reduce "interest rate" risk
Suppose a firm's supplier offer terms of 2/10 net 30. The firm
often pays its invoices on day 20, and does not qualify for the
discount as a result. What effect does this early payment have
on the cost to the firm of not taking the offered discount?
Answer
a.
decreases the cost of foregoing the discount
b.
no effect on the cost of foregoing the discount
c.
increases the cost of foregoing the discount
A firm sells $335,876 of goods per year on credit. If customers

take an average of 31 days to pay, what is the firm's average
accounts receivable balance? (Assume a 365 day year).
Round your answer to the nearest integer.Enter the result
without any punctuation (i.e. dollar sign or commas).
8. A firm buys $273,750 per year from suppliers that offer terms
of 1/10 net 30. The firm does not currently take the offered
discount. If the firm can borrow against a line of credit at the
bank at an interest rate of 15%, it should:
Assume a 365 day year.
Answer
a.
Continue to pay on day 30.
b.
Borrow from the bank and pay on day 30.
c.
Borrow from the bank and pay on day 10 to get the discount.
9. firm is considering borrowing $50,000 from its bank for 60
days to meet working capital needs. The bank offers a loan with
a stated rate of 11% and discount interest. The bank uses a 360
day year to calculate interest. Calculate the APR for the loan.
Enter the result in percentage format with one decimal place.
For example, enter 4.5%
10. A firm with a high level of "cash and marketable securities"
on its balance sheet is most likely to be using the _______ net
operating working capital policy.
Answer PLEASE ENTER YOURS!
a.
restricted
b.
relaxed

c.
moderate
11. A firm's cash conversion cycle has increased by 10 days
over the last year. Check all the items below that could account
for the observed increase.
Answer
a.
the firm's customers pay more quickly than in the past
b.
the firm's customers pay more slowly than in the past
c.
the firm's inventory sells more quickly than in the past
d.
the firm's inventory sells more slowly than in the past
e.
the firm pays its supplier's more quickly than in the past
f.
the firm pays its supplier's more slowly than in the past

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