Week 5: Week 5 – W5 Assignment 2
 
Assignment 2: 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:
Inventory conversion period is 60 Days
Payables deferral period is 30 days
Receivables collection period of 40 days
The second task concerns the cost of bank loans under differing conditions. Specifically:
The company needs $1,500,000 for a new project.
The loan will cost 10% simple interest, for 4 months, with a 20% compensating balance.
Required:
What is the firm’s cash conversion cycle?
How many times per year is the firm’s inventory turnover, if sales are $4,000,000 per year?
If sales are all credit sales and amount to $4,000,000 per year, what is the firm’s average investment in receivables?
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…