to the publie ld uses le pio C. A trucking firm issues common stock grade its tr
ID: 2405145 • Letter: T
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to the publie ld uses le pio C. A trucking firm issues common stock grade its tractor fleet. perating and Cash Conversion Cycles 18-4. (Calculating the cash conversion cycle) (Related to Checkpoint 18.1 on page 617) business can receive 20 days' credit from its supplier on raw materials purchased t will take the business 25 days to convert the raw material into a saleable product. Customers in this sector will pay their invoices 40 days after purchase. a. What is the length of the operating cycle, assuming products are sold as soon as completed? b. How does this differ from the cash conversion cycle? 18-5. (Calculating the operating and cash conversion cycles) (Related to Checkpoint 18.1 on page 617) The Caraway Seed Company has for many years cultivated and sold what are known as heritage plants and seeds. For example, it has sought varieties of tomato plants that are because they take too long to mature, do not ship well, or do not hold up for long on store shelves. The company has recently been considering ways to reduce its invest ment in working capital in order to make itself more profitable. At present, it has an inventory conversion period of 90 days and offers credit terms of 30 days, which are taken full advanfage of by the majority of its customers. The company purchases its inventory items on credit terms that allow it 45 days to-pay, but it has always followed a policy of making cash payments for invoices as soon as they are received, so the accounts payable deferral period is typically only 5 days a. What are Caraway's operating and cash conversion cycles? b. If Caraway decides to take full advantage of its credit terms and delay payment out older no longer grown by commercial vegetable farmers until the last possible date, how will this impact its cash conversion cycle? c. What is your recommendation to the company with regard to its working-capital management practices and why? Managing Current Liabilities 18-6. (Estimating the cost of bank credit) (Related to Checkpoint 18.2 on page 621) Lotfield enterprises is just starting in business and the owner has heard about the need to understand her operating cycle and her cash conversion cycle. She asks you to illustrate and explain why this matters for her cashflow. Her plans are as follows a. Conversion of raw materials to sold product will be 46 days. b. Customers will be required to pay within 34 days. c. Her raw material supplier will give her 10 days of interest-free credit. 18-7. (Calculating the cost of trade credit) (Related to Checkpoint 18.2 on page 621) You have an estimated working capital requirement for the next 180 days that varies be- tween £90,000 and £150,000. You are looking at short-term working capital finance for a period of 180 days, and you have been offered the following alternativ our bank. (Remember the UK 365-day calculation basis.) a. A short-term loan for £150,000, repayable in 180 days based on an annual interest b. An overdraft limit of £200.000 for a 12-month period at a rate of 7 percent but with an up-front fee of £1,000 Suggest which option you would choose assuming you want to minimize your cost of financeExplanation / Answer
18-4 (is only answered)
Length of the Operating cycle = Production time + Collection time
= 25 + 40 = 65 days
Length of Cash cycle = Production time + Collection time - Payable time
= 25 + 40 - 20 = 45 days
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