Problem
• What should your Accounts Payable policy be? Accounts Payable is debt. You are leveraging your vendor's money. However, at 30 days they withhold deliveries and production falls by 1%. Your production costs go up as workers stand idle during parts shortages. At a 60 day policy production falls by 8%. At a zero day policy there are no shortages. Given your measures, what should your AP policy be? Show your calculations.
• Current Debt is typically used to fund Inventory and Accounts Receivable. However, those accounts could also be backed by Retained Earnings. Given your measures, what should be your policy towards Current Debt?
• Long Term Debt is used to fund Plant and Equipment. However, you could use equity (Common Stock plus Retained Earnings). If you eliminate Long Term Debt, its interest payment will disappear, and earnings will go up. However, the profits used to pay off the debt essentially went into the bondholder's pocket. You could pay dividends to shareholders instead.