1.Parramore Corp has $13 million of sales, $1 million of inventories, $4 million of receivables, and $1 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 6% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.

a. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places.

___________days

b. If Parramore couldlowerits inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold, what would be the new CCC? Do not round intermediate calculations. Round your answer to two decimal places. ___________days

c. How much cash would be freed up, if Parramore couldlowerits inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.

$_____________

d. By how much would pretax profits change, if Parramore couldlowerits inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.

$_____________

2.Leyton Lumber Company has sales of $9 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $1.8 million. Assume 365 days in year for your calculations.

a. What is Leyton's DSO? Round your answer to two decimal places.

__________days

b. What would DSO be if all customers paid on time? Round your answer to two decimal places.

__________days

c. How much capital would be released if Leyton could take actions that led to on-time payments? Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.

$______________

3.Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 50; and it currently pays on the 5thday and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations.

a. If Lancaster decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

$____________

b. What would be the nominal cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.

%____________

c. What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.

%__________

d. If the company could get the funds from a bank at a rate of 11%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places.

%__________

e. Should Lancaster use bank debt or additional trade credit?

-Select Bank debt OR Additional trade credit

4.McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,387,000; 40% of the customers pay on the 10thday and take discounts, while the other 60% pay, on average, 50 days after their purchases. Assume 365 days in year for your calculations.

a. What is the days sales outstanding? Round your answer to two decimal places.

___________days

b. What is the average amount of receivables? Round your answer to the nearest cent. Do not round intermediate calculations.

$_____________

c. What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.

%___________

d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 50 days? Round your answers to two decimal places. Do not round intermediate calculations.

Nominal cost:__________%

Effective cost:__________%

e. What would happen to McEwan's accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 30thday? Round your answers to two decimal places. Do not round intermediate calculations.

Days sales outstanding (DSO) =_________days

Average receivables = $____________

5.Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 45% debt-to-assets ratio. Rentz's interest rate is currently 10% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 13% of total sales, and the federal-plus-state tax rate is 40%.

a. What is the expected return on equity under each current assets level? Round your answers to two decimal places.

Restricted policy:_________%

Moderate policy: _________%

Relaxed policy: __________%

b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?

I. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.

II. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.

III. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.

IV. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.

V. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.

-Select-I, II, III, IV, OR V

c. How would the firm's risk be affected by the different policies?

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