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Working Capital Management.

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(1). Indicate by a (+), (-), or (0) whether each of the following events would probably cause accounts receivable, sales, and profits to increase, decrease, or be affected in an indeterminate manner

A/R Sales Profits

The firm tightens its credit standards
The terms of trade are changed from 2/10
Net 30, to 3/10, net 30

The terms are changed from 2/10, net 30
To 3/10, net 40

The credit manager gets tough with
Past-due accounts

(2). Cost of trade and bank loan: Lamar lumber buy $8 million of materials (net of discounts) on term of 3/5, net 60, and it currently pays after 5 days and takes discounts. Lamar plans to expand, and this will require additional financing. IF Lamar decides to forego discounts, how much additional credit could it get, and what would the nominal and effective cost of that credit be? If it could get the funds from a bank rate of 10%, interest paid monthly, based on 365 day year, what would be the effective cost of the bank loan, and should Lamar use bank debt or additional trade credit? Explain.

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(1). Indicate by a (+), (-), or (0) whether each of the following events would probably cause accounts receivable, sales, and profits to increase, decrease, or be affected in an indeterminate manner

A/R Sales Profits

The firm tightens its credit standards (-) (-) (0)
Credit is available to fewer customers leading to reduced sales and reduced A/R. The impact on profits is uncertain as it depends upon trade of between cost of funds, contribution margin ratio and cost of bad debts.

The terms of trade are changed from 2/10 (-) (+) (0)
Net 30, to 3/10, net 30
Credit terms are same but discount on cash payment are higher. More customers will avail discount leading to reduced A/R. The sales may ...

Solution Summary

The solution examines working capital management. The solution indicates whether each event would probably cause accounting receivable, sales and profits to increase, decrease or be affected in an indeterminate manner.

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Working Capital Management

A) Dan plans to use the preceding ratios as the starting point for discussions with SKI's operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the data in the table, does SKI seem to be following a relaxed, moderate, or restricted working capital policy?

b) How can one distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current asset because it is inefficient? Does SKI's working capital policy seem appropriate?

c) Calculate SKI's cash conversion cycle, assuming all calculations use a 360-day year.

d) What might SKI do to reduce its cash and securities without harming operation?

Q 23-3 What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

Q 23-4 From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?

Q 23-5 If long-term credit exposes a borrower to less risk, why would people or firms ever borrow on a short-term basis?

Q 23-9 The availability of bank credit is often more important to a small firm than to a large one. Why?

Mini Case !

a) B&B tries to match the maturity of its assets and liabilities. Describe how B&B could adopt either a more aggressive or more conservative financing policy.

b) What are the advantages and disadvantages of using short-term credit as a source of financing?

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