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What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?
What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?
Is it true that most firms are able to obtain some free trade credit and that additional trade credit is often available, but at a cost? Explain.
Williams & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system.
What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30?
What would happen to average receivables if McDowell toughened up on its collection policy with the result.
Calculate the nominal annual cost of nonfree trade credit under each of the terms.
The Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle.
The Zocco Corporation has an inventory conversion period of 75 days, a receivables collection period of 38 days, and a payables deferral period of 30 days.
The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new store.
If a firm buys under terms of 3/15, net 45, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit
Grunewald Industries sells on terms of 2/10, net 40. Gross sales last year were $4,562,500, and accounts receivable averaged $437,500.
Medwig Corporation has a DSO of 17 days. The company averages $3,500 in credit sales each day.
Distinguish between operating leases and financial leases. Would you be more likely to find an operating lease employed for a fleet of trucks.
Commercial banks moved heavily into equipment leasing during the early 1970s, acting as lessors.
One alleged advantage of leasing voiced in the past is that it kept liabilities off the balance sheet, thus making it possible.
Suppose Congress enacted new tax law changes that would (1) permit equipment to be depreciated over a shorter period.
Assume that Reynolds’s tax rate is 40 percent and the equipment’s depreciation would be $100 per year.
It can obtain a bank loan for 100 percent of the purchase price, or it can lease the machinery. Assume that the facts apply.
If the money is borrowed, the bank loan will be at a rate of 14 percent, amortized in 3 equal installments at the end of each year.
Assuming that the after-tax cost of debt should be used to discount all anticipated cash flows.
To what extent can firms set their own credit policies as opposed to having to accept policies that are dictated by “the competition”?