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Working Capital

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4. Your firm has an average collection period of 48 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely.

5. Firm Z has net working capital of $900, current liabilities of $4,320, and inventory of $1,900. What is the current ratio? What is the quick ratio?

6. Calculate the operating and cash cycles

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4. Your firm has an average collection period of 48 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely.
The transaction basically is a borrowing for 48 days. The principal amount is $98 and the interest amount is $2, since the factor will given you $98 ( 2% discount) and at the end of 48 days will collect $100. We use the simple interest formula to get ...

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