9.23 Review Questions: Chapter Nine
Review Questions: Chapter Nine
- Outline the Cash Conversion Cycle starting with the beginning Cash level.
- You are given the following for Huhr Company. Calculate the Inventory Conversion Period, The Average Collection Period, and The Periodic Payment Period. (The figures are in the millions.) Assume that Credit Sales = $45,000 and COGS = $9,000.
| Cash and Equivalents | 2,000 | Accounts Payable | 800 |
| Inventories | 1,000 | Short-term Debt | 12,200 |
| Accounts Receivable | 4,000 | Total Current Liabilities | 13,000 |
| Total Current Assets | 7,000 | Long-Term Bonds | 7,000 |
| Property, Plant & Equip. | 18,000 | Common Stock | 3,000 |
| Other | 2,000 | Retained Earnings | 4,000 |
| Total Long-term Asset | 20,000 | Total Owners’ Equity | 7,000 |
| Total Assets | 27,000 | Total Liabilities + Equity | 27,000 |
- For how many days will the firm need to finance the gap between its payments and its cash generation?
- How may the firm finance its gap between cash generation and required payments? What financing media are available?
- What is the significance of the Cash-to-Current Liabilities ratio?
- What is meant by the “Cash Burn Rate”? Why is it important?
- Given the following, calculate both the firm’s Average Daily Expenses and its Cash Burn rate.
| Year 1 | Year 0 | |
| COGS | $25,000 | $40,000 |
| S, G & A | $5,000 | $8,000 |
| Annual Operating Expenses | $30,000 | $48,000 |
| Current Assets | $60,000 | $55,000 |
- What considerations will a firm analyze in its establishment of a credit and account receivables policy? Can you name the “Five Cs’?
- What are the two key variables in Baumol’s Cash Optimization Model? Why are they in opposition?
- Here is Baumol’s formula, without the code for the letters given. Given the data, what is the ideal cash order quantity?
(T/C × F) + (C/2 × i)
C* = [(2 × T × F) ÷ i] 0.5
| Yearly Cash Needs= $100 million | Fixed Transaction Costs = $1,000 | Rate = .05 |
- Outline the two variables in the Inventory Optimization Models. Why are they in opposition?
- Here (below) is the formula for the Inventory Model, without the code for the letters given. Given the data, what is the ideal inventory order quantity?
(Q / 2) (P) (C) = (F) (S / Q)
Q* = [(2 F S) ÷ (C P)] 0.5
| Projected annual unit sales= 50,000 | Carrying cost invt’y unit -= 25% |
| Unit inventory purchase price = $50 | Fixed order costs = $1,500 |
- How may a firm attempt to collect on a very late account receivable?
- What is meant by a corporate Credit Scoring System?
- What may be the most important variable, or financial ratio, in Altman’s Credit Scoring model?
- What are some variables that go into scoring a consumer’s creditability?
- What are the pros and cons for both liberalizing and tightening Credit Policy? Use numbers where possible.
- A firm offers terms of “2/10, net 30.” In general, would you say it would pay for the customer to take the discount or not? How come?