Q1.

Cash conversion cycle: Devon Automotive estimates that it takes the company
about 56 days to collect cash from customers on finished goods from the day it receives raw
materials, and it takes about 62 days to pay its suppliers. The companys cash conversion cycle is
-6 days.
DPO = 62 days
Operating cycle = 56 days
Devons cash conversion cycle = Operating cycle DPO
= 56 62
= -6 days
Q2. Operating cycle: NetSpeed Technologies is a telecom component manufacturer. The
company typically has a collection period of 42 days and days sales in inventory of 32 days.
NetSpeeds operating cycle is 74 days.
DSI = 32 days
DSO = 42 days
Lillys operating cycle = DSO + DSI
= 42 + 32
= 74 days
Q3. Cash conversion cycle: Northern Manufacturing Ltd found that during the last year, it
took 59 days to pay off its suppliers, while it took 65 days to collect its receivables. The companys
days sales in inventory was 40 days. Northerns cash conversion cycle is 46 days.
DPO = 59 days
DSI = 40 days
DSO = 65 days

Northerns cash conversion cycle = DSO + DSI DPO

= 65 + 40 59
= 46

Q4. Cost of trade credit: Juggs Ltd sells its goods with terms of 6/8 EOM, net 56. The implicit
cost of the trade credit is 60.08%
Effective annual rate = (1 + Discount/Discounted price)365/days credit 1
= (1 + 6/94)365/48 1
= (1.0638)7.6042 1
= 1.6005 1
= 0.6005, or 60.05 percent

Q5. Formal line of credit: Winegartner Cosmetics is setting up a line of credit at its bank for $5
million for up to two years. The loan rate is 7.72 percent and calls for an annual fee of 72 basis
points on any unused balance for the year. If the company borrows $2.5 million on the day the
loan agreement was signed, the companys effective rate is 8.44%. (Assume the loan is held for
the whole year and the company borrows no more during the year)
Line of credit limit = $5,000,000

Loan rate = 7.72%

Annual fee on unused balance = 0.72%

Amount borrowed = $2,500,000

Unused balance = $2,500,000

Annual fee = $2,500,000 x 0.0072 = $18,000

Interest expense = $2,500,000 x 0.0772 = $193,000

Effective interest rate = (Interest Expense + Annual fee)/Borrowed amount = ($193,000+

$18,000)/$2,500,000 = 8.44%

The effective borrowing rate for the company is 8.44% with the annual fee of 72 basis points.

Q6. Effective interest rate: Morgan Contractors borrowed $2.14 million at an APR
of 8.3 percent. The loan called for a compensating balance of 18 percent. The effective interest
rate on the loan is 10.12%.
Amount to be borrowed = $2,140,000

Stated annual interest rate = 8.3%

Compensating balance = 18%

Amount deposited as compensating balance = $2,140,000 0.18 = $385,200

Effective borrowing amount = $2,140,000 $385,200 = $1,754,800

Interest expense = $2,140,000 0.0830 = $177,620

Effective interest rate = Interest Expense/Effective borrowing amount =

$177,620/$1,754,800 = 10.12%

By setting aside a compensating balance of 18 percent or $385,200 on the loan, the company
increases its interest rate effectively to 10.12 percent.

Q7. Cash conversion cycle: Blackwell Automotive Ltd reported the following information for the
last fiscal year.
Blackwell Automotive Ltd
As of 31/3/2011

Assets Liabilities and Equity

Cash and marketable sec. $ 23,015 Accounts payable and accruals $ 175,161
Accounts Receivable $ 141,322 Notes payable $ 21,115
Inventories $ 172,140
11,223
Other current assets $

Total current assets $ 347,700 Total current liabilities $ 196,276

Net sales $ 936,162

Cost of sales $ 561,697

Blackwells cash conversion cycle is 53.2 days and their operating cycle is 167.0 days.
Accounts receivables = $141,322

Accounts payables = $175,161

Net sales = $936,162

Inventory = $172,140

Cost of sales = $561,697

DSO = Accounts receivable/(Credit sales/365) = $141,322/($936,162/365) = 55.1 days

DSI = Inventory/(COGS/365) = $172,140/($561,697/365) = 111.9 days

DPO = Accounts payable/(COGS/365) = $175,161/($561,697/365) = 113.8 days

Cash conversion cycle = DSO + DSI DPO

= 55.1 + 111.9 113.8
=53.2 days
Operating cycle = DSO + DSI
= 55.1 + 111.9
= 167.0
Q8. Formal line of credit: Lansdowne Electronics has a formal line of credit of $1 million for up
to three years with HND Bank. The interest rate on the loan is 8.86 percent, and under the
agreement, Lansdowne has to pay 99 basis points on the unused amount as the annual fee.
Suppose the company borrows $573,680 the first day of the agreement. The fee the company
must pay is $ 4220.57, and the effective interest rate is 9.60%
Line of credit limit = $1,000,000

Loan rate = 8.86%

Annual fee on unused balance = 0.99%

Amount borrowed = $573,680

Unused balance = $426,320

Annual fee = $426,320 x 0.0099 = $4,221

Interest expense = $573,680 x 0.0886 = $50,828

Effective interest rate = Interest Expense + Annual fee

Borrowed amount

= ($50,828+$4,221) = 9.60%

$573,680
Q9. Operating cycle: Aviva Technologys operating cycle is 81 days. Its inventory level was at
$130,880 last year, and the company had a $1.6 million cost of sales. Aviva must take
51.1days to collect its accounts receivable.
Operating cycle = 81 days

Inventory = $130,880

Cost of sales = $1,600,000

DSI = Inventory/(COGS/365) = $130,880/($1,600,000/365) = 29.9 days

Operating cycle = DSO + DSI

81 = DSO + 29.9
DSO = 51.1 days

It takes Aviva 51.1 days to collect on its receivable.

Q10. Aging schedule: Ginseng Ltd collects 43.6 percent of its receivables in 10 days or fewer, 31
percent in 11 to 30 days, 7 percent in 31 to 45 days, 7 percent in 46 to 60 days, and 11.4 percent
in more than 60 days. The company has $1,087,531 in accounts receivable. Fill in the following
aging schedule for Ginseng Ltd.

Age of Accounts (in days) Value of Account % of Total Account

$
0-10
%
$
11-30
%
$
31-45
%
$
46-60
%
$
Over 60
%
$
Total 100.0%

Accounts receivable = $1,087,531

Age of Accounts (in days) Value of Account % of Total Account

0-10 $474,164 43.6%

11-30 $337,135 31.0%

31-45 $76,127 7.0%

46-60 $76,127 7.0%

Over 60 $123,979 11.4%

Total $1,087,531 100.0%