Question

1. The inventory turnover of Long Corporation is 16×, and its closing inventory is $20,000. Assuming there are 360 days in a year, compute the company's inventory conversion period. (Give answer to one decimal place.)

22.5 days

24.2 days

3.5 days

42.8 days

55.5 days

2. If a firm wants to decrease its cash conversion cycle, which of the following actions should it take? Assume everything else is equal.

Loosen credit terms to increase the firm's sales.

Delay payments made to suppliers so that the firm pays late.

Purchase more raw materials to increase the average inventory the firm maintains.

Increase the amount the firm borrows from its bank.

Decrease the common equity on the firm's balance sheet.

3.

McGrath Corporation recently issued 180-day commercial paper with a face value of $1,500,000 and a simple interest rate of 13 percent. The company paid a transaction fee equal to 0.3 percent of the amount issued, which was taken out of the issue amount before the company received any funds. Assuming there are 360 days in a year, what are the commercial paper's annual percentage rate (APR) and effective annual rate (r_EAR), respectively?

APR =    7.30%; rEAR = 15.12%

APR =    9.73%; rEAR = 9.84%

APR =    13.97%; rEAR = 14.23%

APR =    14.59%; rEAR = 15.12%

APR =    15.34%; rEAR = 15.34%

Answer 1

1. company's inventory conversion period = 360 / inventory turnover

company's inventory conversion period = 360 / 16

company's inventory conversion period = 22.5 Days

2. Option B. Delay payments made to suppliers so that the firm pays late

Option A increases the DSO which inturn increases CCC. Option C also increases CCC. Option D and E are irrelevant to CCC

3. APR = ((Interest + Flotation Cost) / (Amount Issued - Interest - Flotation Cost)) * 2

APR = (1500000 * 0.13 * 180 / 360 + 1500000 * 0.3%) / (1500000 - 97500 - 4500)) * 2

APR = (97500 + 4500) / 1398000) * 2

APR = 0.072961 * 2

APR = 14.59%

EAR = (1 + 0.072961)^2 - 1

EAR = 1.1512  - 1

EAR = 15.12%

Option D is the correct Answer