Finance 419

Week Three Problems

Note: To receive credit, show work on all problems (It can be shown as Excel or financial calculator inputs as well) on either this sheet or in Excel.

1. Financial information for the Hewlett Packard Corporation (HPQ) and General Motors Corporation (GM) are found below:

$ in thousands

31-Oct-08 Hewlett Packard 31-Oct-08 General Motors

Sales 118,364,000 148,979,000

Cost of goods sold 89,592,000 150,603,000

Accounts receivable 29,359,000 7,711,000

Inventories 7,879,000 16,405,000

Accounts payable 32,317,000 24,827,000

Current assets 51,728,000 41,324,000

Current liabilities 52,939,000 73,934,000

Compute the cash conversion cycle for both of these companies

2. Network Solutions just introduced a new, fully automated manufacturing plant that

produces 2,000 wireless routers per day with materials costs of $50 per router and no

other costs. The average number of days a router is held in inventory before being sold

is 45 days. In addition, they generally pay their suppliers in 30 days, while collecting

from their customers after 25 days.

a. What is the cash conversion cycle?

b. What would happen to the cash conversion cycle if they could stretch their payments

to suppliers from 30 days to 50 days?

3) Ashley's Delivery Service is analyzing the credit terms of each of three suppliers, A, B, and C.

(a) Determine the approximate cost of giving up the cash discount.

4. If a firm buys on trade credit terms of 2/10, net 50 and decides to forgo the trade credit discount

and pay on the net day, what is the annualized cost of forgoing the discount (assume a

360 day year) ?

5. You plan to borrow $20,000 from the bank to pay for inventories for a gift

shop you have just opened. The bank offers to lend you the money at 10 percent annual

interest for the 6 months the funds will be needed (assume a 360 day year).

Calculate the annualized rate of interest on the loan.

6. Tiger Corporation purchases 1,200,000 units per year of one

component. The fixed cost per order is $25. The annual carrying cost of the item

is 27% of its $2 cost.

a. Calculate the EOQ

7. Alexis Company uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a shipment after an order is placed, and the firm wishes to hold 10 days’ usage in inventory as a

safety stock.

a. Calculate the EOQ.