Part One: Working Capital Analysis Capers, Inc. has just promoted you to Chief f

Question

Part One: Working Capital Analysis

Capers, Inc. has just promoted you to Chief financial officer. Since this is a new office in the company, you are understaffed and many of the responsibilities have been assigned to you.

The first task you have been assigned concerns the cash conversion cycle. Your boss has asked that you examine the following data:

The second task concerns the cost of bank loans under differing conditions. Specifically:

Required:

Part Two: Cash Budget

Capers, Inc. is developing its cash budget for the next year. Of Capers%u2019 sales, 20% is for cash, another 60% is collected in the month following sale, and 20% is collected in the second month following sale. November and December sales for 2010 were $229000 and $250,000, respectively.

Capers%u2019 purchases its raw materials two months in advance of its sales equal to 70% of its final sales price. The supplier is paid one month after it makes delivery. For example, purchases for April sales are made in February, and payment is made in March.

In addition, Capers pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments for $32,000 are made each quarter beginning in March.

The company%u2019s cash balance at December 31, 2010, was $26,000 and minimum balance of $25,000 must be maintained at all times. Assume that any short-term financing needed to maintain cash balance would be paid off in the month following the month of financing if sufficient funds are available.

Interest on short-term loans (12%) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. For example, if in the month of April the firm expects to have a need for an additional $60,500, these funds would be borrowed at the beginning of April with interest of $605 (.12 x 1/12 x $60,500) owed for April and paid at the beginning of May.

Sales for Capers Inc.:                                             

Required:

Part Three: EOQ

Capers Inc. is also initiating an inventory management program using EOQ. Capers needs fastener supplies to manufacture its products. The CFO estimates that the company will need about 250,000 cases next year. The cost of storing cases is about $1.10 each. The ordering cost is $400 for a shipment.

Required:

Deliverables:

January $229,000 February $250,000 March $270,000 April $275,000 May $280,000 June $290,000 July $280,000 August $260,000

Explanation / Answer

Hi,

Please find the answers as follows:

Part 1:

1) Cash conversion cycle = 60+40-30 = 70 days

2) Inventory conversion period = 365/ inventory turnover ratio

Inventory turnover ratio = 365/ inventory conversion period = 365/60 = 6.08 or 6 times

Inventory Turnover = 6 times

3) Average investment in receivables = Annual credit sales *(Receivables collection period)/365

= 40000000*40/365 = 438356.16

Answer is 438356.16

4)

Nominal Interest Rate on the Loan would be calculated as follows:

Nominal Interest = 1500000*.10*4/12 = 50000

Compensating Balance = 20%*1500000 = 300000

Disbursed Amount = 1500000 - 300000 = 1200000

Nominal Interest Rate = Interest/Disbursed Amount = 50000/1200000*100*12/4 = 12.5%

Answer is 12.50%

Thanks.

Loan Required 1500000 Simple interest 10% Compensating balance 20% Number of months 4

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