Working Capital Management, EOQ, and External Funds

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:

1. Inventory conversion period is 60 Days
2. Payables deferral period is 30 days
3. Receivables collection period of 40 days

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

1. The company needs $1,500,000 ; for a new project.
2. The loan will cost 10% simple interest, for 4 months, with a 20% ; compensating balance.

Required:

1. What is the firm’s cash conversion cycle?
3. How many times per year is the firm’s inventory turnover, if sales are ; $4,000,000 per year? ; ; ; ; ; ; ; ; ; ; ; ; ;
5. If sales are all credit sales and amount to $4,000,000 per year, what ; is the firm’s average investment in receivables?
7. What is the nominal interest rate on the loan?

Part ; Two: ; Cash Budget

Capers, Inc. is developing its cash budget for the next year. Of ; Capers’ 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’ 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’s 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:

• Prepare a monthly cash budget for Capers Inc. covering the ; first 7 months of 2010.

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:

1. What is the EOQ?
2. How many times will you order?
3. What are the shortcomings of the EOQ? What is your ; rationale?

Complete the requirements for Parts One, Two, and Three ; above in a Microsoft Excel document showing all calculations, and in ; good form.