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?
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