a) Explain how a negative cash conversion cycle arises. (2 marks)

b) FIN222 Ltd purchases supplies on terms of 1/10, net 35. If FIN222 Ltd chooses to take the discount offered, it must obtain a bank loan to afford it. WES bank has quoted an APR of 15% on borrowed funds. (3 marks)

i) Once FIN222 Ltd passes the discount period, how much cost will it incur in an annual term?

ii) Calculate the EAR for WES bank.

iii) What should FIN222 Ltd do?

c) Use the following information to answer the questions.

HanKook Motor Corporation Income Statement (in $ millions) For the years ending 31 December

2018 2019 Sales $85,000 $100,000 Cost of goods sold 75,000 85,000 Gross profit $10,000 15,000 Selling, general, admin expenses 7,000 9,000 Operating profit $3,000 $6,000 Interest expense 1,200 1,100 Profit before tax $1,800 $4,900 Taxes 540 1,470 Net profit $1,260 $3,430

HanKook Motor Corporation Balance sheet (in $ millions) For the years ending 31 December

2018 2019 2018 2019 Assets Liability Cash $3,080 6,100 Account payable $3,600 $4,600 Accounts receivable 2,800 6,900 Notes payable 1,180 1,250 Inventory 6,200 6,600 Accruals 5,600 6,211 Total current assets $12,080 $19,600 Total current liabilities $10,380 $12,061 Net plant, property And equipment $23,087 $20,098 Long-term debt $6,500 $7,000 Total assets $35,167 $39,698 Total liabilities $16,880 $19,061 Equity Issued equity $2,735 $2,735 Retained earnings $15,552 $17,902 Total equity $18,287 $20,637 Total liability and equity $35,167 $39,698

i) Calculate the cash conversion cycle (CCC) for HanKook for both 2018 and 2019. (2 marks)

ii) All else being equal, how does this change affect HanKooks need for cash? (1 mark)

iii) HanKooks suppliers offer terms of net 25. Is HanKook doing a good job of managing its accounts payable? Why or why not? (2 marks)