Zocco Corporation has an inventory conversion period of $75$ days, an average collection period of $38$ days, and a payables deferral period of $30$ days.

a. What is the length of the cash conversion cycle?

b. If Zocco's annual sales are $\$ 3,421,875$ and all sales are on credit, what is the investment in accounts receivable?

c. How many times per year does Zocco turn over its inventory? Assume that the cost of goods sold is $75 \%$ of sales.

Lamar Lumber buys $\$ 8$ million of materials (net of discounts) on terms of $3 / 5$, net $60$ ; and it currently pays on the $5^{\text {th }}$ day and takes discounts. Lamar plans to expand, which will require additional financing. If Lamar decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of $10 \%$, interest paid monthly, based on a $365$ -day year, what would be the effective cost of the bank loan? Should Lamar use bank debt or additional trade credit? Explain.

Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017.

$$\begin{matrix} \text{May 2016} & \text{\$ 180.000}\\ \text{June} & \text{180.000}\\ \text{July} & \text{360.000}\\ \text{August} & \text{540.000}\\ \text{September} & \text{720.000}\\ \text{October} & \text{360.000}\\ \text{November} & \text{360.000}\\ \text{December} & \text{90.000}\\ \text{January 2017} & \text{180.000}\\ \end{matrix}$$

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

$$\begin{matrix} \text{May 2016} & \text{\$ 90.000}\\ \text{June} & \text{90.000}\\ \text{July} & \text{126.000}\\ \text{August} & \text{882.000}\\ \text{September} & \text{306.000}\\ \text{October} & \text{234.000}\\ \text{November} & \text{162.000}\\ \text{December} & \text{90.000}\\ \end{matrix}$$

General and administrative salaries are approximately $27,000 a month. Lease payments under long-term leases are$9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are$2,700 a month. Income tax payments of $63,000 are due in September and December. A progress payment of$180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of$90,000 should be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2016. b. Prepare monthly estimates of the required financing or excess funds—that is, the amount of money Bowers will need to borrow or will have available to invest. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects. d. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.

Primrose Corp has $\$ 15$ million of sales, $\$ 2$ million of inventories, $\$ 3$ million of receivables, and $\$ 1$ million of payables. Its cost of goods sold is $80 \%$ of sales, and it finances working capital with bank loans at an $8 \%$ rate. What is Primrose's cash conversion cycle (CCC)? If Primrose could lower its inventories and receivables by $10 \%$ each and increase its payables by $10 \%$, all without affecting sales or cost of goods sold, what would be the new CCC, how much cash would be freed up, and how would that affect pretax profits?

Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 55; and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. If Lancaster decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 9%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Should Lancaster use bank debt or additional trade credit? Explain.

Gamma Medical's stock trades at $\$ 90$ a share. The company is contemplating a $3$-for-$2$ stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company's stock price following the stock split?

On August 26, Mountain Realty Inc. issued for cash 120,000 shares of no-par common stock (with a stated value of $5) at$8. On October 1, Mountain Realty Inc. issued at par value 40,000 shares of preferred 1% stock, $10 par for cash. On November 30, Mountain Realty Inc. issued for cash 18,000 shares of preferred 1% stock,$10 par at $13. Journalize the entries to record the August 26, October 1, and November 30 transasctions.

Journalize the entries to record the August 26, October 1, and November 30 transactions.

Hardin-Gehr Corporation (HGC) began operations $5$ years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit, and it keeps its central billing system there. On average, it takes $5$ days from the time customers mail in payments until $\mathrm{HGC}$ can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by $3$ daysbringing it down to $2$ days. HGC receives an average of $\$ 1,400,000$ in payments per day.

a. How much free cash would HGC generate if it implemented the lockbox system? Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow? How would growth affect your answer?

b. If HGC has an opportunity cost of $10 \%$, how much is the lockbox system worth on an annual basis?

c. What is the maximum monthly charge HGC should pay for the lockbox system?

Leyton Lumber Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are$1.5 million. What is Leyton’s DSO, what would it be if all customers paid on time, and how much capital would be released if Leyton could take action that led to on-time payments?

Indicate using a (+), (–), or (0) whether each of the following events would probably cause accounts receivable (A/R), sales, and profits to increase, decrease, or be affected in an indeterminate manner:

$$\begin{matrix} \text{ } & \text{A/R} & \text{Sales} & \text{Profits}\\ \text{The firm restricts its credit standards.}\\ \text{The terms of trade are changed from 2/10, net 30, to 3/10, net 30.}\\ \text{The terms are changed from 1/20, net 30, to 3/10, net 40.}\\ \text{The credit manager gets tough with past-due accounts.}\\ \end{matrix}$$

McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,921,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 70 days after their purchases. a. What is the days sales outstanding? b. What is the average amount of receivables? c. What is the percentage cost of trade credit to customers who take the discount? d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 70 days? e. What would happen to McEwan’s accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total$1 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz’s interest rate is currently 8% on both short- and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the federal-plus-state tax rate is 40%. a. What is the expected return on equity under each current assets level? b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? Why or why not? c. How would the firm’s risk be affected by the different policies?

Emergency Medical’s stock trades at $145 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company’s stock price following the stock split?

Which of the following statements is most correct? a. If a firm’s expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt will raise the firm’s expected return on common equity (ROE). b. The higher a firm’s tax rate, the lower its BEP ratio, other things held constant. c. The higher the interest rate on a firm’s debt, the lower its BEP ratio, other things held constant. d. The higher a firm’s debt ratio, the lower its BEP ratio, other things held constant. e. Statement a is false; but statements b, c, and d are true.