WORKING

CAPITAL
MANAGEMENT
PRE-DISCUSSION ACTIVITY
PROBLEM 1 CASH CONVERSION CYCLE

• Justine Corporation purchases raw materials on

July 1. It converts the raw materials into
inventory by September 30. However Justine
pays for the materials on July 20. On October 31,
it sells the finished goods inventory. Then, the
firm collects cash from the sale 1 month later on
November 30. If this sequence accurately
represents the average working capital what is
the firm's cash conversion cycle in days?
PROBLEM 2 FLOAT

• Jordan Company writes checks averaging

P15,000 a day, and it takes five days for
these checks to clear. The firm also receives
checks in the amount of P17,000 per day,
but the firm loses three days while its
receipts are being deposited and cleared.
What is the firm's net float in pesos?
Indicate whether negative or positive.
 PROBLEM 3 CREDIT POLICY
A firm currently has sales of $2,000,000
and does not offer credit. Management
expects sales to rise to $2,500,000 if it a. 1 and 3
offers customers thirty days to pay. Which
of the following will probably happen? b. 1 and 4

1. receivables will turn over more rapidly c. 2 and 3

2. receivables will turn over more slowly
d. 2 and 4
3. credit sales will increase by more than the
increase in sales
4. credit sales will increase by less than the
increase in sales
PROBLEM 4 INVENTORY
A firm annually sells 7,890 units. The cost of
placing an order is $100 and the carrying
costs are $2 a unit.
• a. What are the EOQ?
• b. What is the duration of the EOQ?
• c. How many orders are placed annually?
• d. If the safety stock is 100 units, what are the
maximum and average levels of inventory?
PROBLEM 5 ST FINANCING
On a compounded basis, which of the following loans
is more expensive?
a. 2/10, n60
b. $1,000 loan at 3.25 percent per quarter (90
days)
 PROBLEM 6 ON CASH BUDGET
a. 75 percent of sales are for credit, and collections occur after thirty
days.
b. A $100,000 Treasury bill matures in March.
c. Monthly fixed disbursements are $14,000.
d. Variable disbursements are 62 percent of sales and occur one month
prior to sales.
e. A tax payment of $15,000 is due in February.
f. The initial cash is $20,000.
g. The minimum required cash balance is $5,000.
h. Variable cash disbursements are given for April.
 PROBLEM ON CASH BUDGET
January February March April
Sales -- $60,000 80,000 100,000
Cash sales --
Collections --
Other receipts --
Total cash receipts --
Variable disbursements 37,200 30,000
Fixed disbursements
Other disbursements
Total cash disbursements

Net change during

the month
Beginning cash
Ending cash
Required cash
Excess cash to invest
Cash borrowed
 ANSWER ON CB January February March April
Sales -- $60,000 80,000 100,000
a 75% of sales are for credit,
Cash sales -- 15,000 20,000 25,000
. collections occur after thirty days. Collections -- -- 45,000 60,000
b A $100,000 Treasury bill matures Other receipts -- -- 100,000 --
. in March. Total cash receipts -- 15,000 165,000 85,000
c Monthly fixed disbursements are Variable 37,200 49,600 62,000 30,000
. $14,000. disbursements
d Variable disbursements are 62% Fixed disbursements 13,000 13,000 13,000 13,000
. of sales & occur 1 month prior to Other disbursements -- 15,000 -- --
Total cash 50,200 77,600 75,000 43,000
sales. disbursements
e A tax payment of $15,000 is due in
Net change during (50,200) (62,600) 90,000 42,000
February. the month
f The initial cash is $20,000. Beginning cash 20,000 (30,200) (92,800) (2,800)
g The minimum required cash Ending cash (30,200) (92,800) (2,800) 39,200
. balance is $5,000. Required cash (5,000) (5,000) (5,000) (5,000)
Excess cash to invest -- -- -- 34,200
h Variable cash disbursements are
Funds borrowed 35,200 97,800 7,800 --