a$.$ Johnson plans to use the preceding ratios as the starting point for discussions with RR$$s

operating team. Based on the data, does RR seem to be following a relaxed, moderate,

or restricted current asset usage policy?

b$.$ How can one distinguish between a relaxed but rational working capital policy and

a situation in which a firm simply has excessive current assets because it is inefficient?

Does RR$$s working capital policy seem appropriate?

c$.$ Calculate the firm$$s cash conversion cycle given that annual sales are $$660,000$ and cost

of goods sold represents $90\%$ of sales. Assume a $365-$day year.

d$.$ Is there any reason to think that RR may be holding too much inventory?

e$.$ If RR reduces its inventory without adversely affecting sales, what effect should this

have on free cash flow: $(1)$ in the short run and $(2)$ in the long run?

f$.$ Johnson knows that RR sells on the same credit terms as other firms in its industry. Use

the ratios presented earlier to explain whether RR$$s customers pay more or lesspromptly than those of its competitors. If there are differences, does that suggest RR

should tighten or loosen its credit policy? What four variables make up a firm$$s credit

policy, and in what direction should each be changed by RR$?$

g$.$ Does RR face any risks if it tightens its credit policy?

h$.$ If the company reduces its DSO without seriously affecting sales, what effect would this

have on free cash flow: $(1)$ in the short run and $(2)$ in the long run?

i$.$ What is the impact of higher levels of accruals, such as accrued wages or accrued taxes?

Is it likely that RR could make changes to accruals?

j$.$ Assume that RR purchases $$200,000($net of discounts$)$ of materials on terms of $110,$

net $30,$ but that it can get away with paying on the $40$th day if it chooses not to take

discounts. How much free trade credit can the company get from its equipment

supplier, how much costly trade credit can it get, and what is the nominal annual

interest rate of the costly credit? Should RR take discounts?

k$.$ Cash doesn$$t earn interest, so why would a company have a positive target cash

balance?

l$.$ What might RR do to reduce its target cash balance without harming operations?

m$.$ RR tries to match the maturity of its assets and liabilities. Describe how RR could adopt

either a more aggressive or a more conservative financing policy.

n$.$ What are the advantages and disadvantages of using short$-$term debt as a source of

financing?

o$.$ Would it be feasible for RR to finance with commercial paper?

p$.$ In an attempt to better understand RR$$s cash position, Johnson developed a cash

budget for the first $2$ months of the year. She has the figures for the other months, but

they are not shown. After looking at the cash budget, answer the following questions.

$1.$ What does the cash budget show regarding the target cash level?

$2.$ Should depreciation expense be explicitly included in the cash budget? Why or

why not?

$3.$ What are some other potential cash inflows besides collections?

$4.$ How can interest earned or paid on short$-$term securities or loans be incorporated

in the cash budget?

$5.$ In her preliminary cash budget, Johnson has assumed that all sales are collected and thus

that RR has no bad debts. Is this realistic? If not, how would bad debts be dealt with in

a cash budgeting sense?