Financial Management
(B. Working Capital Management)
B.
WORKING CAPITAL MANAGEMENT
tend to have a(n)
A. Increase in the ratio of current liabilities to noncurrent liabilities.
B. Increase in the operating cycle.
C. Decrease in the operating cycle.
D. Increase in the ratio of current assets to current liabilities.
THEORIES:
Working capital management
1. Working capital management involves investment and financing decisions related to:
A. plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and credit.
Moderate
3. Short-term financing plans with high liquidity have:
A. high return and high risk
B. moderate return and moderate risk
C. low profit and low risk
D. none of the above
17. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs
D. amount of spoilage or pilferage
Temporary & Permanent working capital
4. Temporary working capital supports
A. the cash needs of the company.
B. payment of long term debt.
Working capital financing policy
Aggressive
5. Zap Company follows an aggressive financing policy in its working capital management while
Zing Corporation follows a conservative financing policy. Which one of the following
statements is correct?
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of shortterm debt to total debt.
B. Zap has a low current ratio while Zing has a high current ratio.
C. Zap has less liquidity risk while Zing has more liquidity risk.
D. Zap finances short-term assets with long-term debt while Zing finances short-term
assets with short-term debt.
C. acquisition of capital equipment.
D. seasonal peaks.
Cash Management
Motives for holding cash
7. The transaction motive for holding cash is for:
A. a safety cushion
C. compensating balance requirements
B. daily operating requirements
D. none of the above
Float
8. The difference between the cash balance on the firm's books and the balance shown on the
bank statement is called:
A, the compensating balance
C. a safety cushion
B. float
D. none of the above
6. Which of the following would increase risk?
A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.
Cash conversion cycle
9. The length of time between payment for inventory and the collection of cash is referred to as:
A. payables deferral period
C. operating cycle
B. receivables conversion period
D. cash conversion cycle
Conservative
2. As a company becomes more conservative with respect to working capital policy, it would
10. As a firm's cash conversion cycle increases, the firm:
A. becomes less profitable
124
Financial Management
(B. Working Capital Management)
B. increases its investment in working capital
C. reduces its accounts payable period
D. incurs more shortage costs
A.
B.
C.
D.
11. The longer the firm's accounts payable period, the:
A. longer the firm's cash conversion cycle is.
B. shorter the firm's inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.
19. Which of the following statements is correct for a firm that currently has total costs of carrying
and ordering inventory that are 50% higher than total carrying costs?
A. Current order size is greater than optimal
B. Current order size is less than optimal
C. Per unit carrying costs are too high
D. The optimal order size is currently being used
12. The average length of time a peso is tied up in current asset is called the:
A. net working capital.
C. receivables conversion period.
B. inventory conversion period.
D. cash conversion period.
Trade credit
20. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
A. Three days after the invoice is received.
B. The 8th day is the customer’s decision date.
C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.
Receivables management
13. All of these factors are used in credit policy administration except:
A. credit standards
C. peso amount of receivables
B. terms of trade
D. collection policy
14. Which of the following statements is most correct? If a company lowers its DSO, but no
changes occur in sales or operating costs, then:
A. the company might well end up with a higher debt ratio.
B. the company might well end up with a lower debt ratio.
C. the company would probably end up with a higher ROE.
D. the company's total asset turnover ratio would probably decline.
PROBLEMS
Working capital financing
i
. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials
and variable conversion cost. It takes the firm 18 days to convert raw materials into
calculator. Casie’s usual credit terms extended to its customers is 30 days, and the firm
generally pays its suppliers in 20 days.
If the foregoing cycles are constant, what amount of working capital must Casie Company
finance?
A. P1,400,000
C. P 900,000
B. P2,400,000
D. P1,800,000
15. All but which of the following is considered in determining credit policy?
A. Credit standards
C. Accounts payable deferral period
B. Credit limits
D. Collection efforts
Inventory management
16. The use of safety stock by a firm will:
A. reduce inventory costs
B. increase inventory costs
decreases by the amount of the safety stock.
is one-half the level of the safety stock.
Increases by one-half the amount of the safety stock.
Increases by the number of units of the safety stock.
Cash conversion cycle
ii
. Luke Company has an inventory conversion period of 60 days, a receivables conversion
period of 45 days, and a payments cycle of 30 days. What is the length of the firm’s cash
conversion cycle?
A. 90 days
C. 54 days
B. 75 days
D. 105 days
C. have no effect on inventory costs
D. none of the above
18. When a specified level of safety stock is carried for an item in inventory, the average
inventory level for that item
125
Financial Management
(B. Working Capital Management)
iii
.
iv
.
The Spades Company has an inventory conversion period of 75 days, a receivables
conversion period of 38 days, and a payable payment period of 30 days. What is the length of
the firm’s cash conversion cycle?
A. 83 days
C. 67 days
B. 113 days
D. 45 days
are to be paid uniformly. Hyperbole has the opportunity to invest the money at 9% per
annum. The company spends, on the average, P25 for every cash conversion to marketable
securities and vice versa.
What is the opportunity cost of keeping cash in the bank account?
A. P3,825.00
C. P4,190.00
B. P1,912.50
D. P 188.55
Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its
average daily purchases are P50,000. What is the length of the company’s cash conversion
period?
A. 50 days
C. 30 days
B. 20 days
D. 40 days
Annual savings
ix
. What are the expected annual savings from a lock-box system that collects 150 checks per
day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5 days
respectively, if the annual interest rate is 7%?
A. P 5,250
C. P 21,000
B. P 13,125
D. P300,000
Days inventory
v
. What is the inventory period for a firm with an annual cost of goods sold of P8 million, P1.5
million in average inventory, and a cash conversion cycle of 75 days?
A. 6.56 days
C. 52.60 days
B. 18.75 days
D. 67.50 days
vi
.
Receivables management
Carrying cost
x
. The Camp Company has an inventory conversion period of 60 days, a receivable
conversion period of 30 days, and a payable payment period of 45 days. The Camp’s
variable cost ratio is 60 percent and annual fixed costs of P600,000. The current cost of
capital for Camp is 12%.
If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carrying
cost on accounts receivable, using 360 days year?
A. P281,250
C. P 20,250
B. P168,750
D. P 56,250
Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its
average daily purchases are P50,000. What is the length of the company’s inventory
conversion period?
A. 50 days
C. 120 days
B. 90 days
D. 40 days
Average receivables
xi
. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty
percent of the customers pay on the tenth day and take discounts; the other 60 percent pay,
on average, 45 days after their purchases.
What is the average amount of receivables?
A. P70,000
C. P77,200
B. P77,500
D. P67,500
Cash management
Economic conversion quantity (ECQ)
vii
. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid
uniformly. Simile has the opportunity to invest the money at 24% per annum. The company
spends, on the average, P40 for every cash conversion to marketable securities.
What is the optimal cash conversion size?
A. P60,000
C. P45,000
B. P55,000
D. P72,500
xii
Opportunity cost
viii
. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which
126
. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are
expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation of
credit standards will increase credit sales by 20% and increase the average collection period
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
Financial Management
(B. Working Capital Management)
standards will result in an expected increase in the average accounts receivable balance of
A. P 540,000
C. P2,700,000
B. P 900,000
D. P1,620,000
xvi
Investment in receivables
xiii
. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection
period is 45 days, and bad debts are 3 percent of sales. The credit and collection manager
is considering instituting a stricter collection policy, whereby bad debts would be reduced to
1.5 percent of total sales, and the average collection period would fall to 30 days. However,
sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of
sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40 percent
and 360 days per year.
What would be the decrease in investment in receivables if the change were made?
A. P 9,688
C. P 96,875
B. P 12,988
D. P129,975
Inventory management
EOQ
xvii
. What is the economic order quantity for the following inventory policy: A firm sells 32,000 bags
of premium sugar per year. The cost per order is P200 and the firm experiences a carrying
cost of P0.80 per bag.
A. 2,000 bags
C. 8,000 bags
B. 4,000 bags
D. 16,000 bags
Annual demand
xviii
. Marsman Co. has determined the following for a given year:
Economic order quantity (standard order size)
Total cost to place purchase orders for the year
Cost to place one purchase order
Cost to carry one unit for one year
What is Marsman’s estimated annual usage in units?
A. 1,000,000
C. 500,000
B. 2,000,000
D. 1,500,000
Comprehensive
Question Nos. 14 through 16 are based on the following data:
Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in
order to speed collections. At present, 40 percent of Sonata Company‘s customers take the 2
percent discount. Under the new term, discount customers are expected to rise to 50 percent.
Regardless of the credit terms, half of the customers who do not take the discount are expected
to pay on time, whereas the remainder will pay 10 days late. The change does not involve a
relaxation of credit standards; therefore bad debt losses are not expected to rise above their
present 2 percent level. However, the more generous cash discount terms are expected to
increase sales from P2 million to P2.6 million per year. Sonata Company’s variable cost ratio is
75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s
income tax rate is 40 percent.
xiv
xv
. The incremental after tax profit from the change in credit terms is
A. P68,493
C. P60,615
B. P65,640
D. P57,615
5,000 units
P40,000
P 100
P
4
Required annual return on investment
xix
. BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which sells
blank and recorded videos. Pirate Mart purchases tapes from BIBO Company at P300.00
per tape; tapes are shipped in packages of 20. BIBO Company pays all incoming freight,
and Pirate Mart does not inspect the tapes due to BIBO Company's reputation for high
quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Mart
earns 20% on its cash investments. The purchase-order lead time is two weeks.
The following cost data are available:
Relevant ordering costs per purchase order
P80 P90.50
Carrying costs per package per year
3
Relevant insurance, materials handling, breakage, etc., per year
2 P 4.50
What is the required annual return on investment per package?
A. P6,000
C. P1,200
B. P 250
D. P 600
. What are the days sales outstanding (DSO) before and after the change of credit policy?
A. 27.0 days and 22.5 days, respectively
C. 22.5 days and 21.5 days, respectively
B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively
. The incremental carrying cost on receivable is
A. P 843.75
C. P 643.75
B. P8,889.00
D. P6,667.00
127
Financial Management
(B. Working Capital Management)
B. 300 units
Order quantity
xx
. For Raw Material L12, a company maintains a safety stock of 5,000 pounds. Its average
inventory (taking into account the safety stock) is 12,000 pounds. What is the apparent order
quantity?
A. 18,000 lbs.
C. 14,000 lbs.
B. 6,000 lbs.
D. 24,000 lbs
Annual inventory costs
xxiii
. Durable Furniture Company uses about 200,000 yards of a particular fabric each year. The
fabric costs P25 per yard. The current policy is to order the fabric four times a year.
Incremental ordering costs are about P200 per order, and incremental carrying costs are
about P0.75 per yard, much of which represents the opportunity cost of the funds tied up in
inventory.
How much total annual costs are associated with the current inventory policy?
A. P19,550
C. P38,300
B. P18,750
D. P62,500
Optimal safety stock level
xxi
. Each stockout of a product sold by Arnis Co. costs P1,750 per occurrence. The
company’s carrying cost per unit of inventory is P5 per year, and the company orders
1,500 units of product 20 times a year at a cost of P100 per order. The probabilities
of a stockout at various levels of safety stock are:
Units of Safety Stock
Probability of Stockout
0.
0.50
100.
0.30
200.
0.14
300.
0.05
400.
0.01
The optimal safety stock level for the company based on the units of safety stock level
above is
A. 200 units
C. 100 units
B. 300 units
D. 400 units
xxii
D. 400 units
Maximum interest rate
xxiv
. Narra Company is considering a switch to level production. Cost efficiencies will occur
under level production and after tax cost would decline by P70,000 but inventory would
increase from P1,000,000 to P1,800,000. Narra would have to finance the extra inventory at
a cost of 10.5 percent.
What is the maximum interest rate that makes level production feasible?
A. 7.00 percent
C. 8.75 percent
B. 5.83 percent
D. 10.00 percent
Opportunity cost
xxv
. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high
selling products for the coming year. Its supplier quoted a price of P25 per zipper. Diesel
planned to purchase 7,500 units per month but its supplier could not guarantee this delivery
schedule. In order to ensure availability of these zippers, Diesel is considering the purchase
of all these 90,000 units on January 1. Assuming Diesel can invest cash at 12%, the
company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is
A. P127,500
C. P123,750
B. P135,000
D. P264,000
. Paeng Company uses the EOQ model for inventory control. The company has
an annual demand of 50,000 units for part number 6702 and has computed an
optimal lot size of 6,250 units. Per-unit carrying costs and stockout costs are
P9 and P4, respectively. The following data have been gathered in an attempt
to determine an appropriate safety stock level:
Units Short Because of Excess
Number of Times Short
Demand during the Lead Time Period
in the last 40 Reorder Cycles
100
8
200
10
300
14
400
8
What is the optimal safety stock level?
A. 100 units
C. 200 units
Trade credit
xxvi
. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take the
discount is:
A. 2.0%.
C. 36.7%
B. 30.0%.
D. 10.0%.
128
Financial Management
(B. Working Capital Management)
xxvii
. The cost of discounts missed on credit terms of 2/10, n/60 is
A. 2.0 percent
C. 12.4 percent
B. 14.9 percent
D. 21.2 percent
wait until the 30th day when it will receive revenues to cover the payment. If it borrows funds
on the last day of the discount period in order to obtain the discount, its total cost will be
A. P 51,000 less
C. P 75,500 less
B. P100,000 less
D. P 24,500 more
Bank loans
Discount loan
xxviii
. You plan to borrow P10,000 from your bank, which offers to lend you the money at a 10
percent nominal, or stated, rate on a one-year loan. What is the effective interest rate if the
loan is a discount loan?
A. 10.00%
C. 12.45%
B. 11.11%
D. 14.56%
xxxiii
Discount loan with compensating balance
xxix
. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10%
compensating balance? Assume 360 days per year.
A. 20.0%
C. 17.4%
B. 15.0%
D. 22.2%
. Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The
credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day
after each delivery. Thus, the company is considering a 1-year bank loan for P9,800 (98% of
the invoice amount). If the effective annual interest rate on this loan is 12%, what will be the
net peso savings over the year by borrowing and then taking the discount on the materials?
A. P3,624
C. P4,800
B. P1,176
D. P1,224
xxxiv
. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 percent
can be arranged at any time. When should the customer pay the invoice?
A. Pay on the 1st.
C. Pay on the 40th
B. Pay on the 10th
D. Pay on the 60th
Compensating balance with interest
xxx
. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual
interest rate 12%. As a condition of the loan, Premiere is required to maintain a
compensating balance of P300,000 in its checking account. The checking account earns
interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its
checking account for transactional purposes. Premiere’s effective interest costs of the loan
is
A. 12.00%
C. 16.30%
B. 14.25%
D. 15.86%
xxxv
Add-on
xxxi
. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a 12%
stated rate in an add-on arrangement, payable in 12 equal monthly installments.
A. 22.15%
C. 25.05%
B. 24.00%
D. 12.70%
Financing alternative
xxxii
. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net
30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it can
129
. The Peninsula Commercial Bank and Island Corporation agreed to the following loan proposal:
 Stated interest rate of 10% on a one-year discounted loan; and
 15% of the loan as compensating balance on zero-interest current account to be
maintained by Island Corporation with Peninsula Commercial Bank.
The loan requires a net proceeds of P1.5 million. What is the principal amount of loan applied
for as part of the loan agreement?
A. P1,666,667
C. P1,764,706
B. P2,000,000
D. P1,125,000
i
.
Answer: A
Daily working capital required: 200 x 250
Total working capital needed: 28 days x 50,000
CCC = 18 + 30 – 20
50,000
1,400,000
28 days
ii
. Answer: B
Cash Conversion Cycle = Ave. collection period + Inventory cycle days – Ave. Accounts Payable payment days
Inventory cycle in days
60 days
Average collection period
45 days
Operating cycle
105 days
Deduct Accounts payable payment days
30 days
Cash conversion cycle
75 days
iii
.
iv
v
vi
.
.
.
Answer: A
Inventory cycle in days
Average collection period
Operating cycle
Deduct Accounts payable payment days
Cash conversion cycle
75 days
38 days
113 days
30 days
83 days
Answer: D
Inventory conversion period (See #4)
Average collection period (2M/0.1M)
Operating cycle
Less: Ave. Accounts Payable payment days (1.5M/0.5M)
Cash conversion period
50.0 days
20.0 days
70.0 days
30.0 days
40.0 days
Answer: D
Inventory turnover:
Cost of goods sold/Ave. Inventory (8M/1.5M)
Inventory conversion period (360 days/5.33)
5.33x
67.5 days
Answer: A
Annual sales 360 days x 100,000
Inventory turnover 36M/5M
Inventory conversion period 360/7.2
36.0M
7.2x
50.0 days
vii
. Answer: B
Optimal cash conversion size = (9,075,000 x 40 / 0.24)^1/2 = 55,000
viii
.
Answer: B
OTS: (2 x P3,251,250 x P25 ÷ 0.09)^1/2 = P42,500
Opportunity cost: P42,500 ÷ 2 x 0.09
P 1,912.50
ix
.
Answer: C
Reduction in cash float (2.5 + 1.5)
Additional free cash (4 days x 150 x P500)
Annual savings (P300,000 x 0.07)
x
xi
xii
xiii
.
.
.
.
4.0 days
P300,000
P 21,000
Answer: C
Average AR 3,375,000/360 x 30 days
Average investment: 281,250 x 0.60
Carrying cost: 168,750 x 0.12
281,250
168,750
20,250
Answer: B
DSO = (.4 x 10) + (.60 x 45)
Average AR: 900,000/360x31 days
31 days
P77,500
Answer: D
Credit sale = 40,500,000 x 80% =
Increased credit sales: 32,400,000 x 1.2 =
New Average AR 38,880,000/360 x 40 =
Old Average AR 32,400,000/360 x 30 =
Increase in Average AR
32,400,000
38,880,000
4,320,000
2,700,000
1,620,000
Answer: C
Change in average accounts receivables:
Planned: 2,200,000/360x30
Present: 2,500,000/360x45
183,333
312,500
Decrease in AR balance
Variable cost ratio
Decrease in investment in AR
xiv
xv
xvi
.
.
.
Answer: A
Days’ sales outstanding
Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40)
New policy (.5 x 10) + (.25 x 30) + (.25 x 40)
Answer: A
Average receivable
New policy: 2.6M/360 x 22.5
Old policy: 2.0M/360 x 27
Incremental Accounts Receivable
Incremental carrying cost on receivable 12,500 x 0.75 x 0.09
Answer: A
Incremental sales
Variable cost (.75 x 600,000)
Additional bad debts (600,000 x 2%)
Additional carrying cost
Additional discounts (2,600,000 x .5 x 03) –(2,000,000 x .4 x .02)
Before tax increase in income
Less tax
Incremental income
129,667
75%
96,875
27.0 days
22.5 days
162,500
150,000
12,500
843.75
600,000
( 450,000)
( 12,000)
(
844)
( 23,000)
114,156
45,663
68,493
xvii
.
Answer: B
EOQ = (2 x 32,000 x 20  0.8)^1/2 = 4,000 bags
xviii
.
Answer: B
Number of orders made 40,000/100
Annual requirement 400 x 5,000
400
2,000,000
Answer: C
Investment in 1 package (20 x P300)
Required annual return: P6,000 x 0.2
P6,000
P1,200
Answer: C
Average inventory units
Less safety units
Average inventory based on EOQ
Order size 7,000 x 2
12,000
5,000
7,000
14,000
xix
xx
xxi
.
.
.
Answer: D
Safety stockStock out Costs (1)Carrying Costs @
P5Total10010,500500P11,0002004,9001,0005,9003001,7501,5003,2504003502,0002,350
Stockout Costs
100 1750 x .30 x 20 orders = 10,500
200 1750 x .05 x 20
= 4,900
300 1750 x .05 x 20
= 1750
400 1750 x .01 x 20
= 350
Optimal safety stock is 400-unit level with a cost of only P2,350 cost.
xxii
. Answer: B
The optimal safety stock level represents the level that gives the lowest sum of stock out costs and additional
carrying costs. Based on the computation below, the lowest combined costs is P3,340, corresponding to 300-unit
level
First compute the stockout costs based on given probability of demand. Starting with 100-unit level as safety stock, if
the additional demand is 200, the company has stockout of 100 units.
100: (100 x 32* x 0.25) + (200 x 32 x 0.35) + (300 x 32 x 0.20) + (100 x 9) 4,960
200: (100 x 32 x 0.35) + (200 x 32 x 0.20) + (200 x 9)
4,200
300: (100 x 31 x 0.20) + (300 x 9)
3,340
400: (400 x 9)
3,600
stockout per unit x 8 orders per year.
xxiii
.
Answer: A
Ordering costs 4 x P200
Carrying costs (50,000 ÷ 2 x 0.75
Total
800
18,750
19,550
xxiv
.
xxv
.
Answer: C
Savings in Expenses/additional Investment in Inventory = Maximum Interest Rate
70,000 / (1,800,000 – 1,000,000) = 8.75%
Answer: C
Number of units to be purchased in advance: 90,000 – 7,500
Average investments in working capital: 82,500 x 0.5* x P25
Opportunity cost 1,031,250 x 0.12
*The average investment is one-half (82,500 + 0) ÷ 2
82,500
1,031,250
123,750
xxvi
.
xxvii
. Answer: B
With credit terms of 2/10, n/60 one must pay on the 10th day choosing to finance the net payment (invoice price minus
the cash discount) at the rate of 2 percent for 50 days, paying the loan on the 60th day. The annualized rate of foregoing
the discount is 14.9 percent.
k = 2/98 x 365/50 = 14.9%
xxviii
.
xxix
.
xxx
xxxi
xxxii
xxxiii
Answer: C
k = (2  98) x (360  20 = 36.7%
The solution assumes that the company foregoes the discount only once during the year.
.
Answer: B
k = 10 ÷ (100 – 10) = 11.11%
Answer: C
Principal
Less: Discount 200,000 x 0.15 x 90/360
Compensating balance
Net proceeds
Effective rate: (7,500/172,500) x 360/90
Answer: B
Interest expense 1M x 0.12
Less interest income on additional CA balance (200,000 x 0.03)
Net interest cost
Effective interest rate 114,000/(1,000,000 – 200,000)
Answer: A
Interest for 1 year 1M x 12%
Average Principal: [1M + (1M/12)] ÷ 2
Estimated effective rate 120,000/541,667
Alternative solution for approximate effective rate:
(2 x No. of payments x Interest) ÷ [(1 + No. of payments) x Principal]
(2 x 12 x P120,000) ÷ (13 x P1M) = 22.15%
200,000
( 7,500)
( 20,000)
172,500
17.4%
120,000
6,000
114,000
14.25%
.
.
.
Answer: C
Discount 5M x 0.02
Interest (5M x 0.98 x 0.12) x 15/360 =
Savings =
120,000
541,667
22.15%
100,000
24,500
75,500
Answer: A
Purchase discount 10,000 x 0.02 x 200 purchases
Interest on borrowed money 9,800 x 0.12
Savings
Number of purchases: 360 days/15-day interval
4,800
1,176
3,624
200
xxxiv
. Answer: B
The cost of discounts missed is 12.3% which is more than the 8 percent that the bank charges. The company should
borrow on the 10th, pay the invoice, and finance at 8% for the next 30 days (pay off the bank on the 40th).
Cost of foregoing discount: (1  99) x (360  30) = 12.31%
xxxv
.
Answer; B
Net proceeds in pesos
Divided by net proceeds percentage 1.00 – 0.1 – 0.15
Principal amount
P1,500,000
0.75
P2,000,000