FACULTY OF ACCOUNTING AND ADMINISTRATION

Management of Working Capital

EVIDENCE PORTFOLIO

Nombre:Angel de Jesús Madera Osalde

Professor: Cisneros Rodríguez Eduardo José

Fecha:23/11/2022
 CAPITAL MANAGEMENT OF

WORK DEFINITION

The working capital of a company is all those resources that an organization needs to
to operate effectively. Working capital is also known as current assets and these can
be the supplies, the raw material, the labor, among others.

Working capital can be short-term, medium-term, or long-term. It will all depend on the needs of the
company and what it will require as time goes on with its activities.

It is important not to confuse working capital with net working capital, as the latter is the difference
that is presented between the current assets and current liabilities of a company. And working capital, as already
We mentioned it, they are all the current assets of a SME.

IMPORTANCE

The importance of working capital is an investment made by the company in realizable assets in the
short term, such as cash, negotiable securities, accounts receivable, and inventories.

ADMINISTRATION

The elements that make up working capital are:

Cash
Accounts Receivable
Inventories
Accounts payable

Cash
Cash is money in the form of coins or banknotes that is used for making payments and
deposits. It is the money you carry with you, in your wallet or in your pants pocket and, therefore,
It is not necessarily in a database of a bank or other financial institution.

Accounts receivable
Accounts receivable to know how to calculate a company's working capital are all those
amounts of money that a business owes from its customers who purchased services and/or products on credit.

Inventories
Inventories are part of current assets and constitute an investment with no returns in goods.
tangibles, as the money used for the production or purchase of goods is held up until it is
They managed to sell the products with which they currently have the business.

Accounts payable
Accounts payable are the amounts owed by a company to creditors for services or
acquired goods. If a store receives goods in advance of payment, the purchase is placed in the file
of accounts payable. Accounts payable may correspond to merchandise, private services or
public.
 QUESTIONS

Chapter 14: Working Capital Policy

1. Why is it important to manage current assets and liabilities well?

The management of working capital contributes to the financial success of the company, and the decisions
the adopted ones must be balanced in two dimensions: the risk and the performance of the company. The
liquidity level is a central aspect in the management of working capital, too much liquidity leads to
resulting in the underutilization of the assets used to support sales and is the cause of low turnover
assets and lower profitability.

Working capital is essential for all companies, whether due to the amount of cash that
they manage, either by the amount of investment made in accounts receivable, or by the quantity of products
that are managed in the inventories, and by the amount of financial resources they must obtain from
financing, all these decisions depend on the company's line of business.

Facing cash obligations as they arise. In this sense, L. Gitman (2016)

define risk as the insolvency that the company may potentially have to meet its obligations and
It also expresses that risk is the probability of being technically insolvent.

2. Under normal circumstances, when does the position of working capital change?
a company?

during our business cycles, due to the fluctuations that occur within them, due to the
working capital that is employed. In other words, when any recession occurs, it will...
usually decreases, or when it is high season it tends to increase, depending on the nature of the
company.

3. Si una empresa compra materias primas a crédito, ¿Cuáles son las dos Cuentas de capital de
jobs that will be affected? What would happen if the purchase were paid in cash?

It will be the Inventories and Accounts Payable (because being raw materials, they come from
suppliers).
If the company will pay in cash, it would be banks.

4. Develop the equation that produces the balance in accounts receivable once they begin
Cash receipts from credit sales made previously (assume that
Sales collection patterns have stabilized.

Accounts receivable balance = (Daily credit sales) x (Life

average of the account.

5. Suppose that the sales of Suncrest, an orange juice manufacturer, total $3.5
millions every day, If customers, on average, pay for their purchases every 10 days, what
What would be the balance of accounts receivable?

Data
Sales $3.5 million
Average period in which customers pay 10 days
 $3,500,000 x 10 = 35,000,000
Respuesta = 35 millones

6. What steps are necessary to estimate the cash conversion cycle?

To determine the CCE it will be necessary to calculate the operating cycle that corresponds to the time that elapses
from the start of production until the cash from the sale of a product is received, therefore, the
difference in the CCE and CO reveals a position concerning the needs for liquidity or solvency for
confront short-term debts and obligations incurred with third parties.
The CCE has three components and is calculated as follows: EPI: Average Age of the Inventory
PPC: Periodo Promedio de Cobro PPP: Periodo promedio de Pago CCE = EPI + PPC - PPP
Average Age of Inventory: 365

Cost of Sales / Inventory Average Collection Period: Accounts Receivable

Annual sales/365 Average payment period: Accounts payable
Annual purchases/365

7. Defina los términos: periodo de conversión del inventario, periodo de cobranza de

accounts receivable, and deferral period of accounts payable

Conversion period: it represents the number of days inventory is held before being sold.
replaced.

Collection period of accounts receivable: Indicates the average number of days that accounts receivable remain outstanding.
to collect are in circulation, that is, the time it takes to convert into cash.

Accounts payable period: it is the average time a company takes to pay its debts.
your suppliers and creditors.

8. What is the cash conversion cycle model? How can it be used?

to improve the current management of assets?

It emphasizes the time that elapses between the moment the company makes payments or invests in the
inventory production and the moment it receives cash inflows or perceives a return
in cash from your investment in production

CE=PC+[Link]
Crawford Company has an inventory conversion period of 45 days, a period
of collection of accounts receivable of 32 days and a deferral period of the
accounts payable due in 30 days. What is the length of the cash conversion cycle?
the company?

Data
Período de conversión del inventario 45 días Período de cobranza de ctas x cob 32 días Período de
deferment of accounts payable 30 days
Cash conversion cycle = inventory conversion period + accounts receivable collection period
- period deferral accounts payable conversion cycle effect = 45 + 32 - 30 = 47 days Answer = 47 days

10. What two essential issues does working capital policy involve?

1. The way in which these Current Assets (level of Current Liabilities) will be financed.
2. The effects of these levels on the 'Risk - Return' alternative
 11. What does the term current asset investment policy mean?

Target level set for each category of current assets

Guidelines that define the values and financial instruments that should make up a fund's portfolio.
of investment (percentage of fixed or variable income, of national or foreign securities, etc.).

12. What does the term working capital financing policy mean?

As current assets experience variations, the company's financing

it will also do so by shaving the company's risk position and working capital. Hence the
importance of determining the way the company finances its fluctuating current assets. From this
the forms of financing policies for working capital are: aggressive, conservative and
self-assessment or coordination of deadlines.

13. What are the three alternative policies for financing current assets?
Is any better?

● Moderate approach (maturity coupling)

● Relatively aggressive approach

● Conservative approach

The aggressive approach sounds good, since it uses short-term financing and obtains a
higher yield, although the risk is also higher, but being short-term makes it easier
determine the performance.

14. What distinguish the assets permanent circulating of the

temporary current assets?

Temporary current assets are the assets that are sold seasonally, that is, they generate
income only occasionally in the entity, while the permanent current assets are the
that are generating cash all year long.
● For example: a company sells exclusive items at Christmas, this would be the current asset.
temporal.
● A company sells cleaning products all year round, this would be the current assets.
permanent.

15. Which of the three alternative policies for financing current assets is used?
more short-term debt?

The asset financing policy that uses more short-term debt is the Conservative Approach, since
that this is aimed at maintaining high liquidity, as well as in the other asset accounts
current assets, such as inventories and accounts receivable, which is very costly because they are kept
idle resources that eventually become unproductive, with slow asset turnover due to
the large investment in current assets.

16. What are some advantages of short-term debt compared to long-term debt?
in the long term, as a source of capital?

● The debt only lasts a year, so there is no need to continue allocating to the debt for many years.
● Lower interest rates

17. What are some disadvantages of short-term debt?

● Does not allow any type of postponement
● He/She has less time to cover the debt.

18. In your opinion, which of the factors mentioned in this section is the most significant?
impact on the differences that exist in working capital methods
different countries?
these are the factors that I managed to see:

1) Currencies

2) Economic situation

3) Social situation

4) Inflation

5) the role of the government

6) Economic climate
 PROBLEMS

Exercise 14.1 Cristo Candy Corporation manages an average inventory balance of $400,000.
the average cost of goods sold for the company is $4.5 million. What is a) the turnover of
inventory of Christ and b) his conversion period of the inventory?

a) Inventory turnover = Cost of sales / Inventory = 4,500,000 / 400,000 = 11.25 times

b) your inventory conversion period = Inventory / Cost of sales / 360

= 400,000 /(4,500,000/360)= 400,000/12,500= 32 días

Exercise 14.2 Wally's Motors generally has an inventory of $48 million. If the turnover of
inventario de la empresa es 8, ¿Cuáles son a) su período de conversión del inventario y b) el costo
of the goods sold?

a) Inventory conversion period = 360 / Inventory Turnover = 360 / 8 = 45 days

b) Cost of sales = Inventory Turnover * Inventory = 8 * 48,000,000 = 384,000,000

Exercise 14.3 Small Fry Pools usually handles accounts receivable of $80,000 and its annual credit sales
They are $2.4 million. What are a) the accounts receivable turnover of Small Fry and b) the period
of accounts receivable collection (DCV)?

Data
Ctas x cob $80,000
Annual credit sales $2,400,000
a) Accounts receivable turnover = credit sales / accounts receivable = $2,400,000 / 80,000 = 30 times
Response = 30 times

b) Collection period for accounts receivable = accounts receivable / (credit sales/360) = $80,000 / (2,400,000/360)
$80,000 / 6,666.6667 = 12 days
Respuesta = 12 días

Exercise 14.4 Unique Uniforms generally has accounts receivable of $480,000. If the turnover
The company's accounts receivable is 12, what is a) its collection period?
accounts receivable (Days Sales Outstanding) and b) their annual credit sales?
Data

Accounts Receivable $480,000 Receivables Turnover 12 times

a) Collection period for accounts receivable = 360 days / (accounts receivable turnover) = 360 / 12 = 30 days
Respuesta = 30 días

b) Ventas a crédito = rotación ctas x cob * ctas x cob = 12 veces * $480,000 = $5,760,000
Respuesta = $5,760,000

Exercise 14.5 At a given moment, Grandiron Fertilizer usually owes $180,000 to its
providers. The average sales cost of the company is $2.52 million. What are a) the
rotation of the accounts payable of Grandiron Fertilizer and b) the deferral period of the
accounts payable (AP)?
Data:
Ctas por pagar: $180,000
Cost of goods sold (credit purchases): $2,500,000
a) Accounts payable turnover
Cost of sales / Accounts payable = Turnover accounts payable 2,500,000/180,000 = 13.89
b) Payment deferral period (PDCP)
360 days / Accounts payable turnover

360 / 13.89 = 25.91 = 26 days

Exercise 14.6 Momma's Baby Inc.'s accounts payable generally amount to $1.6
millions. If the accounts payable turnover is 20, what are a) the deferral period of
The accounts payable (AP) of the company and b) its annual credit purchases?

Data:
Cuentas por pagar: $1,600,000
Accounts payable turnover: 20

a) PDCP
360 days / Accounts payable turnover

360 / 20 = 18

b) Annual credit purchases (Accounts payable turnover) (Accounts payable)

20 x 1,600,000 = $32,000,000

Exercise 14.7 Saliford Corporation has an inventory conversion period of 60 days, a

collection period of accounts receivable of 36 days and a deferment period of the
accounts payable of 24 days.

a. How long is the company's cash conversion cycle?

60 + 36 - 24 = 72 days

b. If Saliford's annual sales are $3,960,000 and if the sales are on credit, what is the balance?
average in accounts receivable?
$3,960,000/10 times = $396,000 accounts receivable balance

c. How many times a year does Saliford rotate its inventory?

we substitute 360 / 60 (PPI) = 6 days

d. What would happen to Saliford's cash conversion cycle if, on average, the
inventories could rotate eight times a year

360/8 (rot of inv) = 45 days

45+36-24= 57 days new cash conversion cycle

Exercise 14.8 Flamingo Corporation wants to determine the effect that the ratio of its inventory cycle and the
days necessary for the collection of sales (DCV) has in its cash flow cycle. In 2008, the
Flamingo's sales (all on credit) were $180,000 and it earned a net profit of 5%, or $9,000. The cost of
Sales amount to 85% of sales. The inventory turned over eight times during the year and the DCV, or the period
The average collection period was 36 days. The company had fixed assets totaling $40,000. The period of
The deferral of accounts payable for Flamingo is 30 days.

a. Calculate the cash conversion cycle of Flamingo.

360/8 (rot of inv) = 45 days

Applying the CEE formula:

45 + 36 - 30 = 52 days
b. Assuming that Flamingo has insignificant amounts of cash and marketable securities, calculate its
total asset turnover and return on assets (ROA)

c. Suppose that the managers of Flamingo believe that inventory turnover may increase to 10. What are
it would have been the cash conversion cycle, the total asset turnover, and the RSA of Flamingo if the turnover of
Would the inventory have been 10 in 2008?

Exercise 14.9 Return to the GCP example at the beginning

From the chapter. Assume that the collection and payment patterns of both GCP and its clients do not change.

a) Prepare the general balance of GCP at the close of the day on the 31st. Remember that employee salaries,
The 15 previous working days are paid at the beginning of the day, so the salaries are paid on the 31st.
 GCP
Financial position as of December 31
Assets Passive
Circulating Circulating
Cash $2,250,000 Accounts payable $4,875,000
Accounts receivable $10,500,000 Accumulated salaries $225,000
Inventories 0 Doc x pay $3,000,000
Total current $12,750,000 Total circulating $8,100,000
Fixed Asset $300,000
Common equity $300,000
Retained earnings $4,650,000
Total Activo $13,050,000 Total Liabilities + Capital $13,050,000

b. How long will it take GCP to pay back the bank loan it took on the 16th if it uses the profits in
daily cash to pay the loan (ignore interest costs)?

bank loan 3,000,000 20 days

=
daily utilities 150,000

Exercise 14.10 Review table 14-1 of this chapter, which presented the balance sheet of
unilate textiles for three different dates. unilate sales fluctuate throughout the year as
result of the seasonal nature of your business; however, it is possible to calculate your sales in
an average day like the total sales divided by 360, recognizing that daily sales
they will be much higher than this value during their peak sales season and much more
decrease when activities are slow. the projected sales of unilate for 2015 are
$1.65 billion, so daily sales are expected to average $4.583 million. The cost
Projected sales for 2015 is $1,353 million, so daily costs are expected to
of credit associated with production average $3.76 million. assume that all sales and
purchases are made on credit

a. Calculate the inventory conversion period of Unilate as of 30

September 2015 and as of December 31, 2015.
1,353
Inventory Turnover Sep2015= 3.3 times
410
360
PCI Sep2015= 109.09 days
3.3
Inventory Dictation 1,353 times
2015= 4.55
297
360
PCI Dec2015= =79.02
days
4.55

b. Calculate the collection period of accounts receivable for Unilate as of September 30.
from 2015 to December 31, 2015.
rotación promedio de cobranza= ventas / cuentas por cobrar rpcxc = $1,650.00 / 251.50
rpcxc = 6.56 times, for September 15

rotación promedio de cobranza = ventas / cuentas por cobrar rpcxc = $1,650.00 / 198
rpcxc = 8.33 times, for December 15
average collection period = 360 / average collection turnover

average collection turnover = 360 / 6.56 times

average collection rotation = 55 days for September 15

average collection rotation = 360 / 8.33 times

average collection turnover = 43 days by December 15

c. Calculate the deferral period of the accounts payable of Unilate as of the 30th.
from September 2015 to December 31, 2015

rotación promedio por pagar= ctos. de vtas./cxp rpcxp = $1,353.00 / 90

rpcxp = 15.03 times, for September 15

Average accounts payable turnover = sales accounts / accounts payable = $1,353.00 / 33

rpcxp = 41 times, for December 15

average rotation for accounts payable = 360 / 15.03 times

average accounts payable turnover = 24 days as of September 15

rotación promedio por pagar= 360 / 41 veces

average rotation payable = 9 days by December 15

d. Use the values calculated in sections a, b, and c to calculate the cycle duration.
of cash conversion of Unilate on the two balance sheet dates.
CCE Sep 2015 = PCI + PCC + PDCP = 109 + 55 - 24 = 140 days

CCE Dec 2015 = PCI + PCC + PDCP = 79 + 43 - 9 = 113 days

e. In section d, you surely found that the cash conversion cycle was more
longer on September 30 than on December 31. Why were these presented?
results?

Because both the inventory conversion period, the collection period, and the deferral of accounts payable
they were higher in September, and in December all of these decreased significantly, the conversion cycle of
cash is calculated through these variables, so when all decrease in December,
this automatically decreases as well.

f. Can you think of a reason that explains why the cash conversion cycle of
a company with seasonal sales could be different during the season of
low sales and the peak sales season?

This is largely due to the seasons, meaning there are times when they can buy a lot.
inventario porque sus ventas se incrementan, esto sucede por ejemplo en las heladerías en donde su
inventory in summer rises.
Verbrugge produces 1500 batteries daily at a cost of $6 per battery in terms of materials and labor.
For the work, a period of 22 days is required for the raw material to be transformed into a battery.
Verbrugge grants its customers a period of 40 days to cover the payment for the batteries and the company
generally pays its suppliers in 30 days.

a. What is the duration of Verbrugge's cash conversion cycle?

Data:
ppinv= 22 días
40 days
ppcxp= 30 days
cce = 32 + 40 - 30
cce = 32 days

b. If Verbrugge always produces and sells 1,500 batteries per day, what amount of capital does.
Should work be funded?
Data:
Q= 1,500 CV= $6
WORKING CAPITAL INVESTMENT = (Q*CCE)(CV)=(1,500 * 32 DAYS) * $6.00 WORKING CAPITAL INVESTMENT =
$288,000.00

c. How much could Verbrugge reduce its working capital financing needs if
Could you extend the payment terms for accounts payable to 35 days?

Datos:
PPINV= 22 DAYS
PPCXC= 40 DAYS
PPCXP= 35 DÍAS
CCE = 32+40-30 CCE = 27 DÍAS
WORKING CAPITAL INVESTMENT = (Q*CCE)*CV WORKING CAPITAL INVESTMENT = (1,500*27 DAYS)*$6
WORKING CAPITAL INVESTMENT = 243,000
DIF: $45,000.00

d. The management of Verbrugge wants to analyze the effect of a new production process.
proposed has in the investment in working capital. the proposed new production process
it has in the investment in working capital. the new production process would allow verbrugge
decrease the inventory conversion period to 20 days and increase its daily production to
1,800 batteries. however, the new process could cause the cost of the materials and the
labor will increase to $7. assume that the change does not affect the collection period
accounts receivable (40 days) nor the deferral period of accounts payable (30 days),
What will be the duration of the cash conversion cycle and the need for financing?
working capital if the new production process is implemented?

Data:
Q= 1,800 CV= $7 PPINV= 20 DÍAS
PPCXC= 40 DAYS
PPCXP= 30 DAYS
CCE = 20+40-30
CCE = 30 DAYS

Working capital investment = (Q*CCE)*CV Working capital investment = (1,800*30 DAYS)*$8

inversión cap. trabajo = 378,000
Exercise 14.2 Hawley Corporation wants to determine the optimal level of current assets for the year
next. Management expects sales to increase by about $2 million as a result of an expansion
of assets that is currently being carried out. Fixed assets amount to $1 million and the company finances
60% of its total assets with debt and the rest with equity (common equity). The current cost of the
Hawley's interest is 8% on both short-term and long-term debt (which the
the company has 3 alternatives available for the level of
current assets that has projected: 1) a restrictive policy that requires current assets only of
45% of projected sales, 2) a moderate policy of 50% of sales in current assets
and 3) a relaxed one that requires current assets of 60% of sales. The company expects to generate
utilities before interest and taxes (UAII) at a rate of 12% on total sales.

a. What is the expected return on equity with each level of current assets?
Assume a marginal tax rate of 40%.

3 Types of policies
Restrictive (45%) Moderate (50%) Relaxed (60%)
Active $900,000 $1,000,000 $1,200,000
Fixed asset $1,000,000 $1,000,000 $1,000,000
TOTAL ASSETS $1,900,000 $2,000,000 $2,200,000
Debt 1,140,000 $1,200,000 $1,320,000
Common Cap $760,000 $800,000 $880,000
TOTAL $1,900,000 $2,000,000 2,200,000 dollars
LIABILITIES + CAPITAL
Sales $2,000,000 $2,000,000 $2,000,000
UAII (12% sales) $240,000 $240,000 $240,000
Interest (8%) $91,200 $96,000 $105,600
Ut. Before imp. $148,800 $144,000 $134,400
Taxes (40%) $59,520 $57,600 $53,760

Net utility $89,280 $86,400 $80,640

Performance 11.75% 10.8% 9.16%
About Capital

b. In this problem, it has been assumed that the expected sales level does not depend on the asset policy.
circulating. Is this valid?

No, since depending on the type of policy that is implemented, sales vary, which is why it is important of
a good management of working capital.
 Chapter 15: Management of Short-Term Assets
QUESTIONS

Why is cash management important?

In order to determine how much cash one should have with the proper management of cash.
available a company at a given time to ensure that its business operations
normals continue without interruptions.

What are the reasons to hold cash?

To have enough money to maintain the different balances that the company needs, such as:
transaction balance, preventive balance, compensatory balance, and speculative balance.

What is the purpose of a cash budget?

Help management plan investment strategies and loan applications.

Assume that a company's cash flows do not occur evenly over time.
months.

What effect would that have on the accuracy of the forecasted request requirements?
loans?
The maximum financing requirements of the company could be underestimated.

How is uncertainty managed in a cash budget?

Through sensitivity analysis, which involves preparing several cash budgets,

based on different assumptions: a pessimistic forecast, a more likely projection, and a forecast
optimistic. From these cash flow levels, the amount of financing needed is determined
to cover the most adverse situation.

Does depreciation reflect in a cash budget? Explain why.

No, because it is not effective, it only reflects issues of taxable income.

What is flotation? How do companies use flotation to increase efficiency?

cash management?
The float is the difference between the balance shown in a company's checking account or a
person and the balance in the bank records
.
What are some methods that companies use to accelerate cash inflows?
Postal box agreement, pre-authorized credit system, and concentration banking.

What are some techniques to control disbursements?

Concentration of accounts payable, account with zero balance and controlled disbursement account.

Suppose that TRIA Industries issues checks for $50,000 and receives checks for $60,000 each
day. If the checks issued by the company take three days to go through the banking system for their
compensation and the checks he receives take two days in this same process, what is the
net flotation TIA?
(respuesta $30,000)
Net flotation = (50,000 × 3) - (60,000 × 2) = $30,000
What are the characteristics of financial instruments that are considered securities?
appropriate negotiables?

Maturity, risk, liquidity, and yield (interest).

What factors are included in decisions regarding credit policy? Explain how each one functions.
of the factors affects sales and profits.

Credit standards indicate the minimum financial solidity that a client must have in order to be granted the
credit; credit terms are the payment conditions offered to credit customers and the policy of
collections, which are the procedures that a company follows to request payment of its accounts
to be charged.
Define the required days for the collection of rents (DCV). What do they indicate?
How do fluctuations in sales affect them?

It is the average time required to collect accounts receivable.

What is an aging report of accounts receivable? What does it indicate?

How do sales fluctuations affect it?

It is the report that shows how long the accounts have been pending for collection; the report divides the
accounts receivable in specific periods, providing information about the proportion of
accounts receivable that are current and overdue, based on determined deadlines.
What are the types of inventories?

Raw materials, work in progress, and finished products.

What are the three categories of inventory costs?

Those associated with having an inventory, those associated with ordering and receiving the inventory and the
associated with the inventory shortage.

What is the purpose of the EOQ model?

Determine the order quantity that will minimize total inventory costs.

What are safety stock and why are they necessary?

It is the extra inventory held in the warehouse to deal with unforeseen events related to changes.
in the demand or delays from suppliers. They are necessary to avoid falling into a stockout.

Describe some inventory control systems that are used in practice.

Red line method: in this method, a red line is drawn at the bottom of a drawer of the
warehouse, in order to indicate the reorder point.
Computerized inventory control system: it is carried out through the use of computers.
to determine the reorder points and adjust the inventory balances.
Just-in-time system: the manufacturer coordinates production with the suppliers so that the
raw materials for the components arrive just when needed in the production process.
Suppose that Cotton Tops Inc., the distributor of custom-designed t-shirts mentioned
in this section, he discovered that his unit cost was $3.94 instead of $3.84. What would be the EOQ
in this situation?
(Response Q=6,417)
EOQ=√2×O×T =√2× 260× 78,000 =√40,560,000 =6,416.98
What are some factors that make cash management especially
complicated in a multinational corporation?
La posibilidad de que un gobierno extranjero restrinja las transferencias de fondos que salen del país.

Why is granting credit in an international context particularly risky?

Because besides the risk of non-compliance that usually exists, the political and legal environment with
frequency makes it harder to collect overdue accounts and multinational companies owe
worry about the variations in exchange rates between the moment they make the sale and the
moment when they collect the accounts receivable.

What are some factors that make inventory management in companies

Is the operation of multinationals more complex than that of solely national companies?

Due to the logistics problems that arise with inventory management, due to delays in transportation
the goods from the central storage locations to the users spread all over the world,
the value of local currencies against the dollar, the threat of the government expropriating, taxes.
 Disbursement flotation
$ 70,000.00 x 5= $ 350,000.00

Collection flotation
$ 80,000.00 x 4= $ 320,000.00

Net flotation
$ 320,000.00 - $ 350,000.00 = -$ 30,000.00
b) If Clearwater Glass has an opportunity cost of 10%, how much will it be willing to spend each
year to reduce the delay for collection (float) by two days? (Suggestion: assume that all the
released funds are invested at an annual rate of 10%.
 a)
DVP= (40%*10) + (60%*40) = 4+24 = 28 days

b)
Average amount cxc = 900000 * (28/360) = $ 70,000.00

c)

DVP=

Average receivable amount = (40%*10) + (60%*30) = 4+18 = 22 days

900000*(22/360) = $ 55,000.00

Exercise 15-3

Helen Bowers, the new credit manager of Muscarella Corporation, was alarmed to find
that the company sells with credit terms of net payment in 50 days, while the terms
the credit of that industry recently decreased to net payment in 30 days. The company
records annual credit sales of $3 million, which would reduce the annual sales to $2.6 million
millions, but the accounts receivable would drop to 35 days of sales and the savings on the investment
In them, they would be more than enough to more than surpass the losses of profits. The reason for variable cost.
de Muscarella is 70% and his marginal tax rate is 40%. If the interest rate on the
Invested funds in accounts receivable is 11%, should I modify the credit terms?
All operating costs are paid at the time of selling the inventory.

before After
sales $ 3,000,000.00 = $ 8,333.33 Daily sales sales $ 2,600,000.00 = $ 7,222.22 Daily sales
360 360

cost $ 2,100,000.00 = $ 5,833.33 daily cost cost $ 1,820,000.00 = $ 5,055.56 daily cost
360 360

VPN= -$ 5,833.33 + 8333.33 = $ 2,348.64 -$ 5,055.56 + [7222.22] = $ 2,089.85

(1+(11%/360))^60 (1+(11%/360))^35
The credit terms should not be modified as the savings from reducing the days in accounts receivable
charging is not greater than the decrease in sales, so the marginal analysis of the proposal is less than the
actual.
 Current policy New Policy
Sales $ 10,000.00 $ 12,000.00
Accounts by
$ 1,500.00 $ 2,500.00
to charge
days of
30
Charge
Cost of
10% 10%
Capital
DVPC 54 75
DVPC= Accounts receivable/(annual sales/360)
 total costs of
B) inventory = (Order cost)(Number of orders)+(Average inventory)(Handling cost)(Purchase price)

Total costs of
inventory = (62*25)+(1973)(.20)(4)=3100

C) QEO+Inventories = 3873 + 1200 = 5073

D) Average inventory = Maximum inventory/2 + stock = 5073/2 + 1200 = 3136.5

E) Total sales = 240000/3873=5.8days
QEO
Exercise 15.6 Garvin Company has opened a new checking account at Barngrover National Bank. They plan to write checks for $16 million.
each day and deduct them from their records when closing operations on the day they are issued. On average, the bank will receive and compensate (that is,
will deduct them from the company's bank balance) the checks at 5 p.m. on the fourth day after they are issued; for example, a check
Issued on Monday will be compensated on Friday afternoon. The contract with the bank requires the company to maintain a balance.
average compensation of $1.2 million; this balance is $400,000 higher than the cash balance that the company would have deposited in
otherwise.
Garvin will deposit $1.2 million in cash at the moment he opens the account.

a. Suppose that the company makes cash deposits every day at 2 p.m. (and that the bank includes them in the transactions of that day.
day), how much should be deposited each day to maintain a sufficient balance once it reaches a stable state? (To answer the
question, prepare a table that shows the daily balance recorded in the company's books and the daily balance in the bank until it
I reached a stable state). Indicate the required deposit on day 1, day 2, day 3, day 4, and, where applicable, each subsequent day, assuming that the
The company will issue checks for $1.6 million on day 1 and every following day.
b. How many days of flotation does Garvin have?
What final daily balance should the company aim to maintain in the bank records and in its own records?
d. Explain how net floating can help increase the equity value of the company.

A)

B) The company has a float of 4 days, as this is the time it takes for the operation to be reflected in the bank.
C) C) The company must maintain the balance requested by the bank of $1,200,000 and in its records it must have a quantity of -
$5,200,000
a)

Cash budget
December January February
Income
Sales $ 160,000.00 $ 40,000.00 $ 60,000.00
Total, income $ 160,000.00 $ 40,000.00 $ 60,000.00
Expenses
Purchases $ 140,000.00 $ 40,000.00 $ 40,000.00
Salario $ 4,800.00 $ 4,800.00 $ 4,800.00

29
Rent $ 2,000.00 $ 2,000.00 $ 2,000.00
Taxes $ 12,000.00 $ - $ -
Total expenses $ 158,800.00 $ 46,800.00 $ 46,800.00

Cash balance of the month $ 1,200.00 -$ 6,800.00 $ 13,200.00

$
Balance of active at the beginning of the month 400.00 $ 1,600.00 -$ 5,200.00
Cash balance at the end of the month $ 1,600.00 -$ 5,200.00 $ 8,300.00

Target bank balance $ 6,000.00 $ 6,000.00 $ 6,000.00

Excess effect or
Missing -$ 4,400.00 -$ 11,200.00 $ 2,000.00

b)

Cash budget
December January February
Income
Sales $ - $ 160,000.00 $ 40,000.00
Total income $ - $ 160,000.00 $ 40,000.00
Expenses
Purchases $ 140,000.00 $ 40,000.00 $ 40,000.00
Salary $ 4,800.00 $ 4,800.00 $ 4,800.00
Rent $ 2,000.00 $ 2,000.00 $ 2,000.00
Taxes $ 12,000.00 $ - $ -
Total outflows $ 158,800.00 $ 46,800.00 $ 46,800.00

Cash balance month -$ 158,000.00 $ 113,200.00 -$ 6,800.00

Cash balance as of
start
Month $ 400.00 -$ 158,400.00 -$ 45,200.00
Cash balance at the end of the month -$ 158,400.00 -$ 45,200.00 -$ 52,200.00

Target bank balance $ 6,000.00 $ 6,000.00 $ 6,000.00

Excess effect or
missing -$ 164,400.00 -$ 51,200.00 -$ 58,000.00

30
Exercise 15.8 Carol Moerdyk is thinking of applying for a line of credit at her bank and has estimated
a forecast of the following for the company corresponding to 2009 and 2010

The collection calculations obtained from the credit and collection department are
Following: collection sale, 10%; collection is usually done within the month following the one in which
They contracted those costs. The raw materials are usually made within the following month.
to which these costs were incurred. The calculations for labor and raw materials for each month.
son

the general and administrative salaries amounted to 27,000; the rental payments to
9,000; las depreciaciones 36,000; los diversos serán de 2,700; lo sago de imp. 63,000
paid in September and December; the advance of 180,000 to the new study will be maintained
a cash balance.
A.- prepare a cash budget for the last 6 months
B-PREPARE A CALCULATION OF REQUIRED FINANCING
C.-
D.-This produces seasonally, just before sales, without conducting operations of
calculation, explain the solvency ratio and the debt ratio of the company during the year,
suponiendo que todo los requerimientos financieros se saldaron por medio de préstamos
short-term banking please
no, because essentially the plant shows efficiency in its production and the ease that
it has to convert its accounts receivable into liquid cash for operations and the
due dates for accounts payable, however, it must maintain its reserves
for the payment of the taxes.
 A)

FLOATATION X COLLECTION = THE AMOUNT RECEIVED X DAYS IT TAKES

FLOTACIÓN =1,400,000X5= 7,000,000 / NUEVA FLOTACIÓN=1,400,000X2= 2,800,000

B) If this has an opportunity cost of 10%

1,400,000 times 360 equals 504,000,000 divided by 360 divided by 5 equals 72. 360 divided by 2 equals 180. 504,000,000 times 0.10 equals 50,400,000.

50,400,000/72=700,000

50,400,000/180=280,000
THE ANNUAL VALUE OF THE SYSTEM IS 700,000-280,000=420,000

C) the annual value / 12 = 420,000/12=35,000

Exercise 15.10 Pettit Corporation records annual credit sales of 2 million. The current expenses of
collection department totals 30,000.00, the losses from uncollectible debt are 2% and the sales days
accounts receivable are 30, this is aimed at reducing your collection efforts so that expenses
decrease to 22,000 per year. The change is expected to increase the losses from bad debt to 3% and that
increase to 45 days of pending collection sales and an increase of 2.2 million is expected per year.

Should Pettit relax its collection efforts if the opportunity cost of funding is 12%, the ratio
of the variable cost 75% and its marginal tax rate 40%?

Scenario 1

Data:
ventas 2,000,000
collection expenses 30,000
uncollectible 2% = 40,000.00
costo de oportunidad=12%
variable cost 75%,
taxes 40%
Income

ventas =2,000,000/360= 5555.5556

uncollectible = 40,000/360=111.1111

5444.4445

payment

costos variables = 1,500,000/360=4166.6667 gastos de cobranza =30,000/360=83.333

4249.93 IN 30 DAYS

Vpn= Flujo de efectivo / (1+ tasa de descuento) ^ número de periodos

Vpn={(5555.5556-111.1111) /(1+(.12/360)^30}-(4166.67+83.33)=1140.28

Scenario 2

Ventas: 2,200,000
Collection expenses: 22,000
Uncollectible 3%: 66,000
costo de oportunidad=12%
variable cost 75%
taxes 40%

sales = 2,200,000/360 = 6111.11111

incobrables = 66,000/360= 183.3333

= 5927.78
Payment
costos variables = 1,650,000/360=4583.33 gastos de cobranza =22,000/360=61.11
4644.44 IN 45 DAYS
Vpn= Flujo de efectivo / (1+ tasa de descuento) ^ número de periodos
Vpn={(5927.78) /(1+(.12/360)^45}-(4644.44)=1195.09

There is an increase in your VPN of 55, which can be considered viable as long as the conditions are met.
conditions

Exercise 15.11

Size of the
250 500 1000 2000 13000 26000
order
dozens

Number of Orders 104 52 26 13 2 1

Average inventory 125 250 500 1,000 6,500 13,000

Handling cost 195 390 780 1,560 10,140 20,280

Order cost 3,120 1,560 780 390 60 30

Total cost 3,315 1,950 1,560 1,950 10,200 20,310

a)
√
EOQ= 2× O× T = 2×338,000×48
C× PC
338,000
0.20×6 =5,200

b) Órdenes al año= =65orders

5,200
338,000
Order point = delivery time × daily sales = 3 × 2,817
c)
360
d)

Order size 4000 4800 5200 6000

Num. Orders 85 70 65 56
Average inventory 2,000 2,400 2,600 3,000
Handling cost 2,400 2,880 3,120 3,600
Order cost 4,056 3,380 3,120 2,704
Total cost 6,456 6,260 6,240 6,304
 Investigation of our credit bureau

It is a private entity that generates credit history reports for individuals or companies.
where information related to the payment behavior of mortgage loans is included or
automotive companies, credit card accounts or basic services such as electricity or water, among others.

All the information found in the Credit Bureau is confidential and is shared with entities.
financial affiliates that request it. For example, if you want to obtain a credit card, a loan or
a mortgage loan, the bank will request your report from the Credit Bureau to assess if you meet the
necessary requirements. As a person, you can also access a special credit report, which
You can obtain your credit report for free once a year to know your credit history and see who is checking it.
and verify that your information is correct and up to date.

For the same reason, being registered in the Credit Bureau will have positive effects depending on the
payment behavior that you have. If you do not have a history, it will be more complex for you to obtain or
hire any type of financial product.

How does it work?

Since the Credit Bureau is a purely informative entity, it is only responsible for gathering data.
that accumulates over time to generate 'My Score' or numerical indicator, which is located between
the 400 and 850 points. This entity evaluates your credit behavior, which is dynamic and changes in
time according to the fulfillment of your financial obligations.

Finally, it is important to consider that if at any point you stop paying or fall behind on payments,
your score and history will be affected. Therefore, if there is any circumstance that prevents you from complying
with your financial obligations, it is advisable that you regularize your situation as soon as possible, for example,
contacting the institutions where you appear as a debtor and consulting the options for
plan the pending payments.

Chapter 16: Management of short-term liabilities (financing)

deadline QUESTIONS

What types of liabilities are included in short-term credit?

Liabilities originally scheduled for payment in one year. Such as: accrued expenses, accounts payable
pagar, préstamos bancarios y papel comercial.

What types of short-term credits are classified as accrued expenses?

The salaries of the employees, as well as estimated income taxes in the company, security
social, the income taxes withheld from employee payrolls and the taxes on the
collected sales.

What is the explicit cost of accumulated expenses?

It is free, as no explicit interest is paid on the generated funds.

How much control do finance directors have over the dollar amount of expenses?
accumulated?

They have very little control since the accumulated expenses mostly depend on the economic environment.
what are the customs or the industry like.
What is commercial credit?

Commercial credit is the loan granted by one merchant to another when goods and services are
They buy on credit. Commercial credit facilitates the purchase of supplies without immediate payment.

What is the difference between cost-free commercial credit and costly commercial credit?

The cost-free trade credit is the one received during the discount period, while the
expensive is the credit that exceeds the cost-free commercial credit and whose cost is based on the
lost discounts.

How does the cost of expensive commercial credit compare in general with the cost of other sources?
short-term funds?

Finance directors must always use the cost-free component, but they must use the component.
oneroso solo después de analizar el costo de esta fuente de financiamiento para asegurarse de que es
less than the cost of the funds that they could obtain from other sources

Explain how a company that expects to require funds during the next year could ensure
that it will have the necessary funds available.

Through a bank loan, or if applicable, through capital contributions.

What is the difference between a revolving line of credit and a regular line of credit?

In the guarantee that the bank will grant you the credit, in the revolving loan unlike the regular one, the bank
has a legal obligation to provide the credit when the borrower requests it.

What is the difference between a compensatory balance requirement and a fee for disposition of
funds?

Compensatory balance (CB); Minimum balance of the checking account that a company must maintain in a
bank to request the loan of funds, generally it is 10 to 20% of the loan amount
circulation.

Fee for fund disposition. Charge applied to the unused balance of a contract.
revolving credit to compensate the bank for ensuring that funds will be available, when it
I requested the borrower; the fee is generally 0.25% of the unused balance.

The fee for fund disposal is a charge applied to the unused balance of a contract.
revolving to compensate the bank for assuring that those funds will be available

What is the preferential rate and how does it influence the costs of bank loans?

It is the published interest rate that banks charge short-term borrowers with the best credit.
short-term loan rates are generally indexed to the prime rate. That is, the
the preferential rate positively influences the costs of bank loans because it is not a
very high rate like the others.

What are some factors to consider when choosing a bank?

Consider the willingness to take risks, the advisory and consulting, the loyalty to the client,
specialization, what is the maximum loan amount, if it is a commercial bank and what other services
lend.
What is commercial paper?

It is a type of short-term promissory note without security issued by large financially solid companies to
raise funds.

What types of companies use commercial paper to meet their financing needs?
short term?

Companies that have exceptionally good credit risks.

Insurance companies
pension funds
money market mutual funds
banks.

How does the cost of commercial paper compare to the cost of short-term bank loans?
Deadline? And with the cost of the Treasury certificates?

It is calculated in the same way as a loan with discounted interest.

The interest rates are lower than bank loans but higher than certificates of
treasury.

What is the difference between TPA and rTAE?

The difference is that in the rTAE the interest is included in the calculation, whereas in the TPA it is not.

TPA = Tper x M
TAE = (1 + Tper)^m – 1

With everything else unchanged, what causes the APR and the AER to increase?

What causes the APR and the AER to increase is the percentage cost of the period and the payment terms that are
they do during the same period.

With everything else unchanged, how is the effective cost of a loan compared to its rate?
of simple interest if 1) the amount that can be used is less than the principal amount or 2) the
Is the loan period less than a year?

1) Because the percentage cost of financing ends up being even higher than the interest rate.
stipulated.

The effective cost is capitalized over the period of months that the credit is consumed, so the
rates become higher.

How does a discount loan differ from an installment loan?

In the discounted loan, the interest that is calculated on the amount requested for the loan is paid to the
start of the loan period, that is, it is calculated beforehand. In contrast, in the installment loan, it
calcula el interés y después se suma la cantidad solicita en préstamo para obtener así la cantidad a pagar
in equal installments.

What reasons might cause the amount of a loan that a borrower can actually use to be less?
What is the principal amount requested in the loan?

This is due to the compensating balances, that is, the company needs to maintain a balance so that
the operations can be carried out.
Suppose you qualify for a $5,000 loan with a discount, and at an interest rate of
8% si se trata de un préstamo a 6 meses. ¿Cuál es la TPA y la r TAE?(Respuesta: TPA=8.3%; rTAE=

Annual Percentage Rate 8% * (6/12) = 8.3%

Effective Annual Rate ((1 + 0.8)^(6/12))-1 = 8.5%

Si un proveedor ofrece a sus clientes términos de 3/20, 60 neto. ¿Cuál es el costo asociado con
renounce the cash discount and pay the supplier on day 60? Calculate the TPA and the rTAE

TPA = 27.8%
rTAE =31.5%

What is a secured loan?

It is a collateral-backed loan for short-term loans.

Mention two types of current assets that are pledged as collateral for loans.
short term.

Inventories and accounts receivable.

Distinguish between the pledge of accounts receivable and their factoring.

La pignoración de esas cuentas es cuando sirve como colateral para un préstamo a corto plazo, mientras
Factoring is when accounts receivable are sold entirely.

Identify the services that a factor usually provides.

Check the credit

Grant the loan
assume the risk

Mencione las ventajas y desventajas del financiamiento mediante cuentas por cobrar.
Advantages:
Flexibility
Loan guarantee
With factoring, a credit department is provided.
Disadvantages:
Sometimes implicit administrative costs are excessive.
Some commercial creditors may refuse to sell on credit to companies that factor or
pledges his receivables.

Describe three inventory financing methods

.
Unlimited Pledge Rights; it is when the lending institution is given a right over all the
Borrower's inventory, however, the borrower has the freedom to sell the inventory and the value.
the collateral can be reduced below the level that existed when the loan was granted.

Cost of financing; it is an instrument that recognizes that the assets are held in a trust for
the lender. With this method, the borrowing company, as a condition to receive funds from
lender, signs and delivers a fiduciary receipt for the goods, which can be stored in a
public warehouse or they can be kept in the borrower's facilities, but any sale that is made
of the same must be delivered to the lender.
Storage receipts; the financing contract is called terminal storage where in a warehouse
deposit public goods are stored at the time of financing, but it is not very advisable due to
the transportation expenses towards the facilities that they generate. In such a case, it could be established a
warehouse in the field in the name of the borrower and the lender employs a third party to supervise the inventory that goes
stated in the inventory.

What are some advantages and disadvantages of inventory financing?

Advantages:

The amount of funding is flexible because financing is associated with inventory growth.
Increases the possibility of acceptability with a storage contract in the field as a guarantee of
loans
Best practices for storage and, at the same time, savings in handling costs, insurance, losses from theft, and others.

Disadvantages:
The documentation, the requirements for physical separation, and the fixed cost that could be generated in small
companies.
Inventory deterioration
High Current Ratio
 Exercises

a. 1/15, net 20
$ 1.00
Tasa periódica= rper= 0.01010101 1.01%
$ 99.00
Since there are 72 = 360/5 periods of 5 days in a year of 360 days, the APR, or simple interest rate, associated with commercial credit is:
Annual percentage rate= 1.01% x 72 = 72.73%

b. 2/10, net 60
$2.00
Tasa periódica= rper= = 0.02040816 = 2.04%
$ 98.00
Since there are 7.2 = 360/50 periods of 50 days in a year of 360 days, the APR, or simple interest rate, associated with commercial credit is:
Annual percentage rate= 2.04% x 7.20 = 14.69%

c. 3/10, net 45
$3.00
Periodic rate = rper = =
$ 97.00 0.03092784 = 3.09%
Since there are 10.29 = 360/35 periods of 35 days in a 360-day year, the APR, or simple interest rate, associated with commercial credit is
Annual percentage rate= 3.09% x 10.29 = 31.81%

d. 2/10, net 45
$ 2.00
Periodic rate = rper = 0.02040816 2.04%
$ 98.00
Since there are 10.29 = 360/35 periods of 35 days in a 360-day year, the TPA, or simple interest rate, associated with commercial credit is
Annual percentage rate= 2.04% x 10.29 = 20.99%

e. 2/15, net 40
$ 2.00
Tasa periódica= rper= 0.02040816
$ 98.00 2.04%
Since there are 14.4 = 360/25 periods of 25 days in a 360-day year, the APR, or simple interest rate, associated with commercial credit is:
Annual percentage rate= 2.04% x 14.40 = 29.39%
 a.
$ 3.00
Tasa periódica= rper= 0.03092784 3.09%
$ 97.00
Since there are 14.4 = 360/25 periods of 25 days in a 360-day year, the APR, or simple interest rate, associated with commercial credit is:
Tasa de interés simple= 3.09% x 14.4 = 44.54%

b. 45-15=30 360/30=12
3.09%×12=37.11%

Therefore, if payment is made on the 20th, less credit is received than if it is paid on the 15th.
 a)
12

Interest rate=
( ( ( )) )
50,000 0.12
12
=0.12→12 %
50,000

b)

Tasade interés=
( ( ( ) ))
50,000 0.09
12

12
0.1125 → 11.25%
( 50,000 −( 50,000 × 0.20 ))
c)

Interest rate= ( (
50,000 0.0875 12
( )) 11.48%

)
( ( (
50,000− ( 50,000 × 0.15 )− 50,000 0.0875
( 1212 ) )))
d)

Monto del préstamo: $50,000

Nominal rate: 8%

Intereses= 50,000 ×0.08= 4,000

Capital 50,000
= 25,000
2
interest
TAE 4000
= = 16%
capital25000
 Ventas diarias= 4,500,000 =12,500
360

Sales of clients taking discount = 12,500 × 50 % = 6,250

Client term with discount = 6,250 × 10 = 62,500

Accounts receivable clients without discount = Total accounts receivable - Clients with
descuento=437,500−62,500=375,000

Total, without discount: 375,000

Customers without discount term = 375,000 / 6,250 = 60 days

Days of Days of Times to

Discount payment credit Tper year TPA
2/10 net 60 0.02 10 60 2.04% 7.2 14.69%

We have periods of 50 days (60 minus the first 10 days where the discount is applied), for
there are 7.2 periods within a year; The TPA or simple interest rate

60-10=50
360/50=7.2
Tper=2/98= 2.041%
Tpa = 2.041% * 7.2 = 14.69%
TAE=(1+2.041%)^(7.2-1)=(( 1+0.0204)( ^7.2)−1)=0.1565→15.65 %

1 option
 DAYS SOMETIMES TO
Discount Payment Days Credit TPER AÑO TPA TAE
0.03 10 90 3.09% 4.5 13.92% 14.69%

2 option

Monto del préstamo=$500,000

Annual interest = 12%
Compensatory balance = 0
Mes= 12

12
TAE=1+0.1363^(12) -1=0.1363→13.63 %

A Boles Corporation benefits from the bank loan, as it generates a lower APR of 13.64%.
 ANNUAL EFFECTIVE RATE (AER) = (1 + Rper)ni - 1.0 = Raer

A) 12%
rate/360 90 days (3 months) periods
B) 12.01% 0.00031944 2.875% 4

c) 12.68% 0.00033333 1% 12

D)

Days of Days of Times at

Discount payment credit Tper year TPA
1/15 net 60 0.01 15 60 1.01% 8 8.08%

TAE=1+0.01010^8-1=0.0837→8.37 %

Exercise 16.7 Assume that a company makes purchases of $3.6 million per year with terms of 2/10 net 30 and
take advantage of the discounts.

a. What is the average net amount of discounts from accounts payable? (Assume an amount of 3.6 million)
Net purchases after discounts; that is, gross purchases amount to $3,673,469 and discounts are $73,469.
Also use a year of 360 days

Net purchases of $
discount 3,600,000.00
Days in the year 360
Discount days 10
$
Purchases per day 10,000.00
$
CPNDCXP 100,000.00

[Link] there any cost of commercial credit that the company

use?

There is no commercial credit, as the company is taking advantage of

the discount

If the company does not take advantage of the discounts and pays on time, how much will its accounts payable be?
What would be the TPA and the rTAE of this commercial credit not free of cost? Assume that the company records the
net accounts payable after discounts.
 Net
TPA purchases of
rTAE $
36.73%
discount 3,600,000.00 Days 30
Days in a year 360 43.86% Days desc 10
Discount days 10 Additional days 20
Discount rate 2%
Frequency of
Periodic rate 2.04% 0.02040816 payment 18

$
New payment 300,000.00

d. What would the TPA and the rTAE be if the discounts are not taken if the company can extend?
your payments at 40 days?

Net purchases of $
TPA rTAE 24.49%
discount 3,600,000.00
Days per year 360 27.43%
Discount days 10 Days 40
Days off 10
Discount rate 2%
Additional days 30
Periodic rate 2.04% 0.02040816
Frequency of
payment 12
a)

Monto del préstamo=$300,000 Interés

anual= 13%
Compensating balance = 0
Mes=12

$300,000*13%*(12/12) = 39000 = 0.1494 = 14.94%

$300,000-
Tasa periódica= rper= ($300,000(13%(12/12))) = 261000

TAE=1+0.1494^ -1=0.1494→14.94 %
12

Days of Days of Times at

Discount payment credit Tper year TPA
2/10 net 30 0.02 10 30 2.04% 18 36.73%

TAE= 1+0.0204^{18-1=0.4383→43.83 %

Days of Days of
Discount payment credit Tper Times a year TPA
6.54545454
2/10 net 65 0.02 10 65 2.04% 13.36%

TAE=1+0.0204^6.55-1=0.1414→14.14 %

a. Based strictly on comparisons of the effective annual interest rate, how should Gallinger finance?
its expansion?
Comparing the periodic rate of 14.94 and 13%, it is advantageous for Galliger to finance by stopping the discount and increasing with
Hello accounts payable.

b. What qualitative factors should Gallinger consider before making a decision?

You should consider whether the provider is taking drastic measures as they are postponing the payment for an additional 30 days.
additionally obtain better financing from banks.
 Data:
$
450,000.0
Loan: 0
Account balance $
of checks: 50,000.00

Alternatives 1 2 3
Rate of
Interest: 9.25% 10% 9.25%
Interest: 41,625 45,000 41,625
Balance
Compensator
: 0% 15% 0%
Balance
Compensator
: 0% 67,500 0%
Account Balance
Cheques: 0% 50,000 0%
Balance
Compensator
: 0% 17,500 0%
Type of Int. Revolvent
Credit: Int. Desc. Simple e
Honorarios: 0.25%
Fees: 1,375
Amount of
Loan: 1,000,000
a. Calculate the effective cost (rate) of each financing alternative if UFSU requests a loan of $450,000.
What alternative should UFSU use?

Alternate
Alternative 1 Alternative 2 a3
Interest Commission
Interests Interests +
s n
Interest Loan Balance
- Loan
Loan s o - Cheques
450,000 - 41,625 450,000 - 17,500 41,625 + 1,375
41,625 45,000 43,000
408,375 432,500 450,000
I= 10.19% I= 10.40% I= 9.56%

The cost of alternative "1" is 10.19%; of the "2" it is

10.40% and that of "3" is 9.56%
The option that UFSU should choose is Number 3 because it presents
the lowest cost.

b. In the case of each alternative, how much should UFSU borrow to have $450,000 available for
its use (to pay the company's bills)?

Alternative 1 Alternative 2
Loan Interest
s
Balance
- Cta
Rate of
1 Interest Loan check Alternative 3
o - s What is a line of credit
1 - 0.0925 . revolving. Asks for $450,000 and
450,000 %Balance this is received. Q= $450,000
1 - Comp.
0.9075
$ 1 - 0.15
495,867.7 450,000 - 50,000
Q= 7

400,000
1
$470,588.2
R = The amount that should be requested to have $450,000.00 available in the
alternatva "1" $.495,867.77
in the "2" $470,588.24 and in the "3"
$.450,000.00
 a)

3
Tasa periódica=r
=
135,000
(12) 0.0281 → 2.81 %
PER
1,500,000−(1,500,000×0.20)

TPA=rFOR ×
3

b)

3
1,500,000×0.09×
(12)
Periodic rate = r PER
=
( ()1) 2 0.0289 → 2.89%

1,500,000 −( 1,500,000 × 0.20 )− 1,500,000 × 0.09 3

×
12
TPA=r ×m=0.0289× →11.57 %
0.1157
PER
3

c)

LOAN $1,500,000.00
$507,518.68
NET LOAN 1,200,000.00

rTAE = 0.09 × 3 = 0.18 → 18%

1.5
TAE 18.00%
 Exercise 16.11 Bankston Feed and Supply Company
purchase with terms of 1/10, net 30, but has not
I have been taking advantage of the discounts and it has really
paid in 60 days instead of paying in 30. A
Continuation appears the balance sheet of Bankston
(in thousands of dollars):

CASH 50 CxP 500

CxC 450 IOUs X TO PAY 50
INVENTORIES 750 ACCUMULATED EXPENSES 50
CURRENT ASSET 1250 SHORT-TERM LIABILITIES 600

FIXED ASSET 750 LONG-TERM DEBTS 150

TOTAL ASSETS 2000 COMMON EQUITY 1250
TOTAL LIABILITIES AND EQUITY
Now the Bankston suppliers threaten to stop
the shipments unless the company starts to do CONTBLE 2000
quick payments (meaning that it was paid within 30 days or less).
the company can apply for a loan with a promissory note in
a year (call it a current liability) from your bank
with a discount interest rate of 15%, with a
20% compensatory balance required (The 50,000 of
effects in Bankstone are needed for transactions
(cannot be used as compensatory balance)
a) determine what action Bankstone could undertake
when calculating 1) the cost of burdensome commercial credit and
the cost of the bank loan
b) suppose that Bankstone stops making the deductions
and then request a loan for the necessary amount
to catch up on their accounts payable in
the bank. How high will the bank loan be?

a) 1 BURDENSOME COMMERCIAL COST

COMMERCIAL COST DESC/COSTO-DESC*360/30-10
22.22%
b)

Tasa de descuento=15%
Fondos requeridos=50000
Compensatory balance=20%
The bank loan must be $76,923.08.
}

a)

1)
b. Is it necessarily the source with the lowest expected cost that is selected? Justify your answer.
Yes, because it is the cheapest of the 4 options $25,833
a. How much accounts receivable should be factored to obtain $500,000?

Factoring = usable fund 500,000 500000

(1−%commission)−(interest p (1−0.02)−(0. 0.97 $515,463.92

b. If Cooley can reduce its credit expenses by $3500 per month and avoid losses due to bad debts of 2.5 percent on the authorized amount,
What is the total cost in dollars of the factoring contract?

Comisión=$ 515,463.92 $10,309.28 Interest + commission = $15,463.92

×0
Interés=515,463.92× 0.12×$5,154.64

Gastosde crédito=3,500 TOTAL CONTRACT COST = 15,463.9 - 3,500 - 12,886.6 = ($922.68)

Pérdidas incobrables=515$12,886.60

c. What would be the total cost of the factoring contract if the funds that Cooley needs increased to $750,000? Would the factoring contract be profitable under these circumstances?

Factoring = usable fund 750,000 750,000

(1−%commission)−(interest p ( 1−0.02)−(0. 0.97 $773,195.88

Comisión=$ 773,195.9 ×0.0$15,463.92 Interest+commission=$23,195.88

Interés=773,195.9× 0.12× $7,731.96
1

Credit expenses=3,500 TOTALCOSTOFTHECONTRACT=23,195.87-3,500-19,329.9= $365.98

Pérdidas incobrables=773$19,329.90
 a)

My Loan Interest 9%/12 Unused balance 1% annual commission

July $ 550,000.00 $ 4,125.00 $ 950,000.00 $ 791.67
August $ 1,300,000.00 $ 9,750.00 $ 200,000.00 $ 166.67
September $1,500,000.00 $ 11,250.00 $ - $ -
October $1,250,000.00 $ 9,375.00 $ 250,000.00 $ 208.33
November $900,000.00 $ 6,750.00 $ 600,000.00 $ 500.00
December $ 300,000.00 $ 2,250.00 $ 1,200,000.00 $ 1,000.00
$ 43,500.00 $ 2,666.67

TOTAL DEL COSTO= $ 46,166.67

b)

storage fee in field = $2,000 + annual interest 8% on outstanding credit + 1% of the maximum amount
 Me Quantity
July $ 250,000.00
August $ 1,000,000.00
September $ 1,200,000.00
October $ 950,000.00
November $ 600,000.00
December $ -
$320,000
Annual interest on outstanding credit = $4,000,000 × 0.08 = $26,666.67
12
Maximum cost of the extended credit = $1,200,000 × 0.001 = $12,000

COSTOTOTAL DEL ALMACENAJE DECAMPO=$2,000+$26,666.67+$12,000=$40,666.67

c)

You should choose the field storage cost as it is the cheapest.