Reference no: EM13500831

1.What are the three steps involved in establishing a credit policy?

2.The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?

3.The Mighty Power Tool Company has the following accounts on its books:

The firm extends credit on terms of 1/15, Net 30. Develop an aging schedule using 15-day increments through 60 days, and then indicate any accounts that have been outstanding for more than 60 days.

4.What is meant by “stretching the accounts payable”?

5.Simple Simon’s Bakery purchases supplies on terms of 1/10, Net 25. If Simple Simon’s chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A local bank has quoted Simple Simon’s owner an interest rate of 12% on borrowed funds. Should Simple Simon’s enter the loan agreement with the bank and begin taking the discount?

6.Your firm purchases goods from its supplier on terms of 3/15, Net 40.

a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40?

b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 50?

7.Use the financial statements supplied below for International Motor Corporation (IMC) to answer the following questions.

a. Calculate the cash conversion cycle for IMC for both 2009 and 2010. What change has occurred, if any? All else being equal, how does this change affect IMC’s need for cash?

b. IMC’s suppliers offer terms of Net 30. Does it appear that IMC is doing a good job of managing its accounts payable?

8.Ohio Valley Homecare Suppliers, Inc. (OVHS), had $20 million in sales in 2009. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000.

a. Calculate the average number of inventory days outstanding for OVHS.

b. The average days of inventory in the industry is 73 days. By how much would OVHS reduce its investment in inventory if it could improve its inventory days to meet the industry average?

9.Which of the following short-term securities would you expect to offer the highest before-tax return: Treasury bills, certificates of deposit, short-term tax exempts, or commercial paper? Why?