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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

(see chart in attached file)

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#### Solution Preview

Please see the attached file.

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 ...

#### Solution Summary

The solution has various calculations relating to working capital.

\$2.19