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Working Capital

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1) For the Morton Inc Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365-day year, what is the length of the firms cash conversion cycle?
a. 87 days
b. 90 days
c. 65 days
d. 48 days
e. 66 days

2) Other things held constant, which of the following will cause an increase in working capital?
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.

3) A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it pays after 67 days. What is the nominal annual cost of not taking the discount? (Assume a 365-day year.)
a. 21.71%
b. 22.07%
c. 22.95%
d. 23.48%
e. 24.52%

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Solution Summary

The solution has problems in cash conversion cycle, impact on working capital and cash discounts

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1. Cash Conversion Cycle = AR Days + Inventory Days - AP Days
Cash Conversion Cycle = 60+72-45 = 87 days

2. c Merchandise is sold at a profit, but the ...

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