Chapter 2

Use the summarized financial information for The J. Willis Holding Company (JWHC) shown in the table below for problems 1 through 4.

Revenues CGS

Cash & Equivalents Accounts Receivable

Inventory

Accounts Payable Accruals

Notes Payable

Last Year $5,700.00 $4,560.00

$714.80 $500.00 $300.00

$320.00 $40.00 $70.00

Current Year $5,050.00 $4,040.00

$120.00 $500.00 $340.00

$300.00 $50.00 $60.00

1. For both years, calculate the current ratio, quick ratio, NWC, and WCR. Interpret the values for the current year. Also, discuss the observed two-year trend in solvency.

1. For both years, calculate the CCC (and its components), the NLB, and DCH. Interpret the values for the current year. Also, discuss the observed two-year trend in liquidity.

1. Suppose that a creditor stipulates that JWHC must maintain a quick ratio of 1.50. Use the values for cur-rent liabilities in the current year to calculate the required level ofcash holdings and accounts receivable.

1. If the CFO of JWHC wants the firm to target a WCR of $0, then what change in current operating assets is required (all else constant)?

Use the following information for problems 5 through 8. Revenues = $4,200,000 CGS = 45 percent of revenues Receivables = $1,100,000 Payables = $700,000 Inventory = $800,000

5. Calculate and interpret the operating cycle.

6. Calculate and interpret the CCC.

7. What DPO is required for the CCC to equal 90 days?

8. Building on problem 7, suppose that the firm is able to drop DPO to the required level so that the CCC is 90 days. What would this mean for the level of accounts payable and the WCR (assuming all else constant)?

9. Suppose a firm uses cash to cover a $50,000 accounts payable. Calculate the impact this transaction would have on the current ratio if the initial value of the current ratio equaled:

a. 1.0 b. 0.5 c.1.7

10. J. Stark Industries has $1,000,000 in cash holdings and annual CGS of $2,500,000. Management has targeted a DCH of 250 days for the next fiscal year.

a. Assuming that CGS will remain unchanged in the upcoming year, what change in cash holdings would be required?

b. Assuming that cash holdings will remain unchanged in the upcoming year, what change (increase or decrease) in CGS would be required?

11. Ewing Oil is a privately held firm that specializes in production and distribution of crude oil. Ewing Oil has cash holdings of $500,000 and an available line of credit of $1,000,000. Inspection of the firm's historical financial data indicates an average daily net cash flow of $250,000 with a standard deviation of $800,000. Calculate Ewing Oil's and the probability that the firm will remain liquid.

12. Use the information from the previous problem to determine the available line of credit that would be necessary to achieve the following values for :

a. 2.00 b. 2.50 c. 3.00

13. Determine the probability of liquidity and illiquidity associated with the given values.

a. 3.15 b. 2.25 c.1.85