Fi 515 Week 7 Homework Keller Graduate School

FI16 – 1 William & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 5 while maintaining the same level of sales, how much cash will be freed up?

Ans –

Sales $10,000,000

Inventory Turnover ratio (old) 2

Inventory Turnover ratio (new) 5

Freed up Cash ?

So, let’s find out the freed up cash

We know level of inventory are calculated as follows

Inventory = SalesInventory turnover ratio

Calculating $ value of old inventory

Inventory Old = $10,000.0002

= $5,000,000

Calculating $ value of New inventory

Inventory New = $10,000,0005

= $2,000,000

The freed up cash would be = Old Inventory – New Inventory

= $5,000,000 - $2,000,000

= $3,000,000

16 – 2 Medwig Corporation has a DSO of 17 days. The company averages $3,500 in credit sales each day. What is the company’s average account receivable?

Ans –

If we recall the formula to calculate DSO (Daily Sales Outstanding):

DSO =

So we have DSO of 17 days and also have average sales i.e. $3,500

Putting this in equation

17 =

So Accounts Receivables will be

Accounts Receivable = 17 X $3,500

= $59,500

16 – 3 What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30?

Ans –

Nominal cost of Trade formula is:

= discount percentage100- Discount Percentage x 365Days credit is Outstanding-Discount Period

So putting values in equation:

= 397 X 36530-15

= 0.03093 x 24.33

= 0.75263

= 75.26%

Effective Cost of Trade Formula is:

Periodic rate = 0.03 / 0.97 = 0.3093

Periods/year = 365 / (30-15) = 24.33

EAR = (1 + periodic rate)N – 1

= (1.03093)24.33 – 1 = 109.84%

16 - 4 A large retailer obtains merchandise under the...