Question

1) Sam Inc. Provides the following information on its working capital management. It has an inventory turnover of 26 and an accounts payable turnover of 14. The accounts receivable period is 38 days. What is the length of the cash cycle?

2) Currently, your firm sells 120 units a month at a price of $51 a unit. You think you can increase your sales by an additional 10 units if you switch to a net 30 credit policy. The interest rate is 2. 0 percent per month and your variable cost per unit is $25. What is the net present value of the proposed credit policy switch?

3) Six months ago, you purchased 250 shares of Jun, Inc. Stock at a price of $43. 75 a share. The company pays quarterly dividends of $0. 37 a share (you received two dividend payments. ) Today, you sold all of your shares for $37. 72 a share. What is your total percentage return on this investment?

4) Bridgewater Inc. Is expecting sales of $620 in April, $660 in May, $800 in June, and $800 in July. The firm collects 30% of sales in the month of the sale, 50% in the month after the sale, and 20% in the second month after the sale. What will be the accounts receivable balance at the end of June?

Answer 1

I can help you solve these problems! Here are the solutions:

1) The cash cycle is the sum of the inventory conversion period (ICP) and the accounts receivable period (ARP) minus the accounts payable period (APP). The ICP is the number of days it takes to sell inventory, and can be calculated as 365 days divided by the inventory turnover ratio. The APP is the number of days it takes to pay suppliers, and can be calculated as 365 days divided by the accounts payable turnover ratio. Using the given information, we can calculate:
ICP = 365/26 = 14.04 days
APP = 365/14 = 26.07 days
ARP = 38 days
Cash cycle = ICP + ARP - APP = 14.04 + 38 - 26.07 = 25.97 days

Therefore, the length of the cash cycle is approximately 26 days.

2) To calculate the net present value (NPV) of the proposed credit policy switch, we need to calculate the additional contribution margin from the extra 10 units sold, and discount it back to the present using the interest rate. The contribution margin per unit is the price minus the variable cost, which is $51 - $25 = $26. With the credit policy switch, the additional contribution margin from the extra 10 units sold is:
$26 x 10 = $260
To calculate the present value of this additional contribution margin, we can use the formula:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the interest rate per period, and n is the number of periods. In this case, the future value is $260, the interest rate is 2.0% per month, and the number of periods is 1 (since we're calculating the present value of the extra contribution margin over one month). Plugging in the numbers, we get:
PV = $260 / (1 + 0.02)^1 = $254.90
The net present value of the credit policy switch is the present value of the additional contribution margin minus the cost of the credit, which is zero in this case. Therefore, the NPV is $254.90.

3) To calculate the total percentage return on this investment, we need to calculate the total amount of dividends received and subtract the total cost of the investment, then divide by the total cost. The total amount of dividends received is:
2 x $0.37 x 250 = $185
The total cost of the investment is:
250 x $43.75 = $10,937.50
The proceeds from selling the shares is:
250 x $37.72 = $9,430
The total return is the proceeds plus the dividends received, minus the cost of the investment:
$9,430 + $185 - $10,937.50 = -$1,322.50
The total percentage return is the total return divided by the total cost, multiplied by 100%:
($1,322.50 / $10,937.50) x 100% = -12.09%
Therefore, the total percentage return on this investment is approximately -12.09%.

4) To calculate the accounts receivable balance at the end of June, we need to calculate the amount of sales that will be collected in each of the three collection periods, and add them up. In April, the firm will collect 30% of $620, or $186. In May, the firm will collect 50% of $660, or $330. In June, the firm will collect 20% of $800, or $160. Therefore, the total accounts receivable balance at the end of June will be:
$186 + $330 + $160 = $676

Therefore, the accounts receivable balance at the end of June will be $676.