Working Capital and Current Assets Management

1. M Fishing Products is analyzing the performance of its cash management. On the

average, the firm holds inventory 65 days, pays its suppliers in 35 days, and collects its
receivables in 15 days. The firm has a current annual outlay of P1,960,000 on operating
cycle investments. Minny currently pays 10 percent for its negotiated financing.
(Assume a 360 day year.)
a. Calculate the firm's cash conversion cycle.
b. Calculate the firm's operating cycle.
c. Calculate the daily expenditure and the firms annual savings if the operating cycle
is reduced by 15 days.

2. A firm has arranged for a lockbox system to reduce collection time of accounts
receivable. Currently the firm has an average collection period of 43 days, an average
age of inventory of 50 days, and an average payment period of 10 days. The lockbox
system will reduce the average collection period by three days by reducing processing,
mail, and clearing float. The firm has total annual outlays of P15,000,000 and currently
pays 9 percent for its negotiated financing.
a. Calculate the cash conversion cycle before and after the lockbox system.
b. Calculate the savings in financing costs from the lockbox system.

#1

a. CCC = 65 + 15 - 35 = 45
b. OC = 65 + 15 = 80
c. Daily expenditure = 1,960,000/360 = 5,444.44
Annual savings = 5,444.44 x 15 x .10 = 8,167

#2

a. CCC before lockbox = 43 + 50 - 10 = 83

CCC after lockbox = 40 + 50 - 10 = 80
b. 15,000,000/360 = 41,666.67 per day x 3 x .09 = 11,250
1. The length of time it takes for the initial cash outflows for goods and services to be realized as
cash is called : product life cycle , manufacturing cycle , vicious cycle , cash conversion cycle .
2. Which of the following is incorrect ?
a. Probability varies directly with liquidity .
b. The greater the risk , the greater is the potential retyrn .
c. Long-term financing has less liquidity risk than short term investment financing , but
has a higher explicit cost , hence lower return .
d. More current assets lead to a greater liquidity , but yield lower return .
3. Cash inflows = cash outflows
a. Unit Break- even point
b. Contribution margin Ratio
c. Cash-break even point
d. None of the above
4. Cost which is a fixed amount which includes cost of securities transactions or cost of obtaining
a loan .
a. Variable cost
b. Transaction cost
c. Fixed cost
d. Total cost of maintaining the cash balance
5. An EOQ type model of determining the optimum cash balance .
a. Miller-Orr Model
b. Baumol Model
c. Cash budget
d. Operating cycle
solution
:

Mailing float 4 days

Processing(recording)float 2
Clearing float 3
Total float 9 days

FG Invty TO 576,000 X 75% AR TO 576,000

12,000 80000
36 times 7.2 times

(360/36) 10 days (360/7.2) 50 days

RM invty TO 96000
8000
AP TO 120000 12 times
5000
24 times Average age ( 360/12) 30 days

(360/24) 15 times CCC 30 + 10+ 50 - 15 = 75 days

Average Inventory age 10 days

Average age of receivable 60 days
Average age of AP (15) days
Number of days in cash
flow cycle 55 days
1 CM/u = 25-15 = 10 per unit
CMR = 10 / 25 = 40%

2 BEPu = 100,000/10 = 10,000 units

BEPP = 100,000/40% = 250,000

3 Required sales to earn desired profit before tax

Sales in units = Fixed costs + desired profit / Unit CM

= 100,000 + 20,000 / 10
= 12,000 units

Sales in pesos = Fixed costs + desired profit/ CMR

= 100,000 + 20,000/ 40%
= 300,000

4 Required sales to earn a desired after-tax net profit (NP)

F x C + NP/1 - T x R / CM per unit

Required sales /unit = ---------------------------------------- F x C = fixed cost
CM / u
100,000 + 21,000 / 70%
= ------------------------------
10
= 13,000 units

F x C + NP/1 - T x R / CM per unit

Required sales /unit = ----------------------------------------
CMR
100,000 + 21,000 / 70%
= ------------------------------
40%
= 325,000

5 Required peso sales with desired profit ratio

FxC 100,000
Required sales = ----------- = ------------
CMR -PR 40% - 8%
= 100,000 / 32%

= 312,500
6 Required sales in units to earn a desired profit /unit

FxC 100,000
Required sales in U = ----------- = ------------
UCM-P/U P 10 - P 2
= 100,000 / 8

= 12500 UNITS

7 Units Pesos
Average monthly sales 11,000 275,000
Less Break-even sales 10,000 250,000
Margin of safety 1,000 25,000

8 MS 1,000 25,000
MSR = ' ----- = ---------- or ---------- = 9%
S 11,000 275,000

BES 10,000 250,000

BESR = ------ = ------- OR --------- = 91 %
S 11,000 275,000

BES is a complement of MSR

If MSR is 9% then BESR = 100% - 9% = 91 %

CM
9 OFL* or DOL ** = -----------------
Profit before tax
110,000
= ---------- = 11
10,000
* operating leverage factor
** Degree of operating leverage

Sales ( 11,000 x 25 ) 275,000

x CMR 40%
CM 110,000
Fixed costs 100,000
Profit before tax 10,000

10
F xC 100,000 + 20,000
New BEP in unit = -------- = ------------------------ = 12,000
UCM 10
1. The length of time it takes for the initial cash outflows for goods and services to be realized as
cash is called : product life cycle , manufacturing cycle , vicious cycle , cash conversion cycle .
2. Which of the following is incorrect ?
a. Probability varies directly with liquidity .
b. The greater the risk , the greater is the potential retyrn .
c. Long-term financing has less liquidity risk than short term investment financing , but
has a higher explicit cost , hence lower return .
d. More current assets lead to a greater liquidity , but yield lower return .
3. Cash inflows = cash outflows
a. Unit Break- even point
b. Contribution margin Ratio
c. Cash-break even point
d. None of the above
4. Cost which is a fixed amount which includes cost of securities transactions or cost of obtaining
a loan .
a. Variable cost
b. Transaction cost
c. Fixed cost
d. Total cost of maintaining the cash balance
5. An EOQ type model of determining the optimum cash balance .
a. Miller-Orr Model
b. Baumol Model
c. Cash budget
d. Operating cycle
 Working Capital and Current Assets Management

1. M Fishing Products is analyzing the performance of its cash management. On the

average, the firm holds inventory 65 days, pays its suppliers in 35 days, and collects its
receivables in 15 days. The firm has a current annual outlay of P1,960,000 on operating
cycle investments. Minny currently pays 10 percent for its negotiated financing.
(Assume a 360 day year.)
a. Calculate the firm's cash conversion cycle.
b. Calculate the firm's operating cycle.
c. Calculate the daily expenditure and the firms annual savings if the operating cycle
is reduced by 15 days.

2. A firm has arranged for a lockbox system to reduce collection time of accounts
receivable. Currently the firm has an average collection period of 43 days, an average
age of inventory of 50 days, and an average payment period of 10 days. The lockbox
system will reduce the average collection period by three days by reducing processing,
mail, and clearing float. The firm has total annual outlays of P15,000,000 and currently
pays 9 percent for its negotiated financing.
a. Calculate the cash conversion cycle before and after the lockbox system.
b. Calculate the savings in financing costs from the lockbox system.

#1

a. CCC = 65 + 15 - 35 = 45
b. OC = 65 + 15 = 80
c. Daily expenditure = 1,960,000/360 = 5,444.44
Annual savings = 5,444.44 x 15 x .10 = 8,167

#2

a. CCC before lockbox = 43 + 50 - 10 = 83

CCC after lockbox = 40 + 50 - 10 = 80
b. 15,000,000/360 = 41,666.67 per day x 3 x .09 = 11,250
 Assignment -Risk and Return 11/24/2021
1. UC is planning to invest in a security that has several possible rates of return . Given the
following probability distribution of the returns , what is the expected rate of return on the
investment ? Also , compute the standard deviation of the returns . What do the resulting
numbers represent ?
Probability (A) P(kj) Return (B) (kj) Expected Return (k) Weighted Deviation
A xB (kj –k)2 P(kj)
.10 -10% -1% 52.9%
.20 5% 1% 12.8%
.30 10% 3% 2.7%
.40 25 10% 57.6%
K = 13% ợ2 = 126.0%
ợ = 11.22%

From our studies in statistics ,we know that if the distribution of returns were normal , then UC could
expect a return of 13 % with a 67 percent possibility that this return would vary up and down by
11.22 percent between 1.78% ( 13-11.22%) and 24.22 percent ( 13 + 11.22 %). However , it is apparent
from the probabilities that the distribution is not normal .

2. Given the following holding period returns , calculate the average returns and the standard
deviations for the KC Co. and for the market .

Month KC Co. Market

1 4% 2%
2 6% 3
3 0 1
4 2% -1

KC CO.

AVERAGE RETURNS

4% + 6% + 0% + 2%
4

= 3%

STANDARD DEVIATION OF
( 4% - 3% ) 2 = 1
+ ( 6% - 3%) 2 = 9

+ ( 0% - 3% ) 2 = 9

+ ( 2% - 3% ) 2 = 1 √20/3= 2.58
4-1 3
MARKET

2% + 3% + 1% - 1%
4

= 1.25

STANDARD DEVIATION OF
( 2% - 1.25% ) 2 = .5625
+ (3 % - 1.25%) 2 = 3.0625

+ ( 0% - 1.25% ) 2 = .0625

+ (-1% - 1.25% ) 2 = 5.0625 √8.75/3= 1.71

4-1 3
1. future value of 4,600 received today and deposited at 9 percent for three years. ( 4600 x (1.09)3
Calculate
=5,957
2. Calculate the present value of 89,000 to be received in 15 years, assuming an opportunity cost of 14
percent. (89,000 X ( 1/(1+.14)15 =12,468 )
3. Jeanie has deposited 33,000 today in an account which will earn 10 percent annually. She plans to
leave the funds in this account for seven years earning interest. Calculate the amount of funds after 7
years .(33,000 X (1.1)7 = 64307
4. Since individuals are always confronted with opportunities to earn positive rates of return on their
funds, the timing of cash flows does not have any significant economic consequences. F
5. Time value of money is based on the belief that a dollar that will be received at some future date is
worth more than a dollar today. F
6. Future value is the value of a future amount at the present time, found by applying compound interest
over a specified period of time F
7. Interest earned on a given deposit that has become part of the principal at the end of a specified period
is called compound interest. T
8. The future value interest factor is the future value of 1 per period compounded at i percent for n
periods. T
9. For a given interest rate, the future value of 100 increases with the passage of time. Thus, the longer
the period of time, the greater the future value. T
10. The greater the potential return on an investment and the longer the period of time, the higher the
present value. F
11. The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the
______ interest rate.
a. effective
b. nominal
c. discounted
d. continuous
12. The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ______
interest rate.
a. effective
b. nominal
c. discounted
d. Continuous
13. Refers to the formulation and administration of plans and policies to efficiently and satisfactorily meet
manufacturing and merchandising requirements and minimize costs relative to inventories .(inventory
management )
14. Lending by ultimate borrowers with no intermediary . The SSU gives money to the DSU in exchange
for financial claims on the DSU(Direct Finance)
15. A broker is one who acts as an intermediary between buyers and sellers but does not take title to the
securities traded .
16. The market for debt instruments of any kind is called the bond market .
17. Market involved in loans in autos , appliances , education , travel. Consumer credit market
18. A financial market in which newly issued primary and secondary securities are traded for the first
time. Primary market
19. The most stringent step in the collection process is
a. letters.
b. personal visits.
c. collection agencies.
d. legal action.
20. A firm's ______ specifies the repayment terms required of all credit customers *
a. credit scoring
b. credit terms
c. credit policy
d. credit standards
21. Which of the following is NOT one of the five C's of credit? (character , Capital , capability
,collateral)
22. A wealthy industrialist wishes to establish a 2,000,000 trust fund which will provide income for his
grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be
distributed. The grandchild may only receive the interest earned. If the interest rate earned on the trust
is expected to be at least 7 percent in all future periods, how much income will the grandchild receive
each year? (2M x .07 = 140,000)
ASSIGNMENT – TIME VALUE OF MONEY

1. To what amount will the following investment accumulate ?

a. 5,000 invested for 10 years at 10% compounded annually
b. 5,000 invested for 10 years at 10% compounded semi-annually
c. 5,000 invested for 10 years at 10% compounded quarterly
d. 5,000 invested for 10 years at 10% compounded monthly orrection
5,000 , 10% COMPOUNDED ANNUALLY FOR 10 YEARS

FV = 5,000 ( 1+ .10) 10 = 12,968.71

Long computation
1st year 5500 (5000 x1.1)
2nd 6050 (5500 x1.1)
3rd 6655 (6050 x1.1)
4th 7320.5 (6655 x1.1)
5th 8052.55 (7320.5 x1.1)
6th 8857.805 (8052x 1.1)
7th 9743.586 (8857.80X1.1)
8th 10717.94 (9743.586 x1.1)
9th 11789.74 10717.94x 1.1)
10th 12968.71 (11789.74x1.1)

Semi-annually
FV = 5,000 ( 1+.05)20 = 13,266.49

Quarterly
FV = 5,000 ( 1+.025)40= 13,425.32

Monthly
FV = 5,000 ( 1+.008333)40= 13,529.84

Correction for the monthly computation should be 120 instead of 40 = 13,534.67

2. At what rate must your 11,167 be compounded annually for it to grow to 20,000 ?
At what rate must your 11,167 be compounded annually for it to grow to 20,000

20,000 /11,167 = FVIF I, 10 yrs

1.79 = FVIF , 10 yrs.
look for row 10 = 6%
3. What is the present value of 500 to be received in 10 years from today if
our discount rate is 6% ?
PV- 500 (1/(1+.06)10)
= 500 ( 1/1.791)
= 500(.558)
= 279
( PVIF – used as multiplier to calculate the present value )

4. What is the present value of a 10-year 1,000 annuity discounted back to the present at 5% ?
1000 , 5% interest , PMT 1000
PV = 1000 ( ∑ 1/1.05)10 PV = 1000 (PVIFA 5% , 10yrs )
1000 (7.7222)
= 7,722
5. If to provide a college education we are going to deposit 500 at beginning of each year for the
next five years in a bank where it will earn 6% interest , how much will we have at the end of
five years ? (annuity due )
FV = 500 (FVIFA, 6% 5yrs)(1+k)
 = 500 (5.637)(1+.06)
= 2,987.61
Or
Year
1 500 x 1.06 530
2 (530+500 )x 1.06 1,091.80
3 (1091.80+500)x 1.06 1,687.31
4 (1,687.31+500)x1.06 2,318.55
5 (2,318.55+500) x1.06 2,987.66*
‘* rounding off difference .05
6. If to provide a college education we are going to deposit 500 at end of each year for the next
five years in a bank where it will earn 6% interest , how much will we have at the end of five
years ? (ordinary annuity )
FV = 500 ( 1.06)4 + 500(1.06)3 + 500(1.06)2 +500(1.06) + 500 = 2,818.50
Or

Year FV
1 500 deposited end of the year 500
2 500 x .06 30 + 500 + 500 1,030
3 1,030 x .06 61.80 +1,030 + 500 1,591.80
4 1591.80 x .06 95.508 + 1,591.80+500 2,187.308
5 2,187.308 x 06 131.24 + 2,187.308 + 500 2,818.54648
B Corporation uses the Baumol Cash Management model to
determine its optimal cash balance .
For the coming year , the expected cash disbursement total
P 432,000 . The interest rate on marketable securities is 5%
per annum . The fixed cost of selling marketable securities
is P 8 per transaction .

Using the Baumol cash management model , compute the

√2 (𝑇)(𝐹)
Optimal cash balance = 𝐾
√2 (8)(432,000)
5%
=

= 11,757.55

Optimal Average cash balance = 11,757.55 / 2

= 5,878.78
You are considering 2 independent projects , project A and project B.
The initial cash outlay associated with project A is 50,000 , and the
initial cash outlay for project B is 70,000 . The required rate of return
on both projects is 12 % . The expected annual free cash flows for each
project are as follows:

Year Project A Project B

0 -50,000 -70000
1 12,000 13,000
2 12,000 13,000
3 12,000 13,000
4 12,000 13,000
5 12,000 13,000
6 12,000 13,000

Required : Compute for the net present value and profitability index
Indicate if the project should be accepted

Required rate of return is 12 %

Yr Project A B
0 -50,000 -70,000
1-6 12,000 13,000
x 4.111 x 4.111
49,332 53,443
NPV (668.00) (16,557.00)

Profitaility 49,332 53,443

Index 50,000 70,000

0.98664 0.76347143

Do not accept both project

IRR 50,000 = 12,000(PVIFA , 6 yrs )

50,000= PVIFA , 6 yrs
12,000
4.16666667 = PVIFA , 6 yrs
You are considering a project that will require an initial outlay
of P 54,200 . This project has an expected life of five years and will
generate after- tax cash flows to the company as a whole
of P 20,608 at the end of each year over its five-year life . In addition
to the P 20,608 free cash flow from operatons during the fifth and
final year, there will be an additional cash inflow of P 13,200 at the
of the fifth year associatd with the salvage value of a machine ,
making the cash flow in five year equal to 33,808. Thus , the free cash
flows associated with this project look like this :

Year Free Cash Year Free cash

Flow Flow
0 -54200 3 20608
1 20608 4 20608
2 20608 5 33808

Given the required rate of return of 15% , calculate the following :

a. Payback period
b. Discounted payback
c. Net present value
d.Profitability index

a. Payback Period 54200 b. Discounted payback

20608 33592
= 54,200 20608 12984 Year Free Cash PVIF 15% Discounted Year Free cash PVIF 15% Discounted
20,608 20608 -7624 Flow Cash flow Flow Cash flow
= 2.620 years 20608 -28232 0 -54200 54200 3 20608 0.65752 13,550.17 7,147.20
20608 -48840 1 20608 0.86957 17,920.10 36,279.90 4 20608 0.57175 11,782.62 (4,635.43)
2 20608 0.75614 15,582.53 20,697.37 5 20608 0.49718 10,245.89 (14,881.31)
c. Net present value 33,502.63 35,578.68

=
3 years + 7,147.20/11782.62
= 20,608/(1+.14) 4 + 33,808/(1+.15) 5 -54,200 3 years + .606588 years
3 years + 7.27906 mos
= 20,608 (2.855) + 33,808 (.497) - 54,200 3 years , 7 months

= 58,836 + 16,803 - 554,200

= 21,439

Note : 2.855 = present value of an annuity of 1 for 4 years

.497 = present value of 1 for 5 years

d. Profitability index

= 75,639 ( 58,836 + 16,803)

54,200
= 1.396