Finc5000 Homework Assignment for Week 9:

FINC5000 Homework Assignment for Week 9:
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For Week 9, please turn in the answers to the following questions:

1.   Define the following terms:
2.   Working capital management is said to be a “trade-off” between two goals.   Explain this statement.
3.   Explain what is meant by the term “cash conversion cycle.”
4. Suppose it takes a computer manufacturer 10 days to build and sell computers.   Also suppose it takes the firm’s customers 30 days, on average, to pay for the computers after they have purchased them on credit.   Finally, suppose the firm is able to delay paying for the computer parts it uses in the manufacturing process for 20 days.   Given these conditions, how long is the firm’s cash conversion cycle?
5.   Given that cash accounts generally don’t pay any interest, why should firm’s hold any cash at all?
6.   Given that accounts receivable represents a delay in the receipt of cash that could be put to good use, why do firms allow credit purchases at all?
7.   What are the three categories of inventory costs?

8.   What is “trade credit?”

9.   Suppose your firm buys $1,000 worth of supplies on credit with terms 3/15 n60.

a. What does “3/15 n60” mean?
b. If you pay the bill on the 14th day after the purchase, what is the cost of the trade credit you have used for the 14-day period?
c. If you pay the bill on the 50th day after the purchase, what is the cost of the trade credit you have used for the 35-day period after the discount period ended?
10.   If your firm buys $1,000 worth of supplies on credit with terms 3/15 n60 and pays the bill on the 50th day after the   purchase:

a. What is the approximate, or “nominal,” cost of trade credit as an annual rate?

b. What is the exact cost of trade credit as an annual rate?