week 7 assignments

please complete the attached assignment along with week 7 pearson.com assignment and quiz

Week 7 – Assignment Problems

P1. Cash conversion cycle
American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables; and, a 365-day year.

a.
Calculate the firm’s operating cycle.

b.
Calculate the firm’s cash conversion cycle.

c.
Calculate the amount of resources needed to support the firm’s cash conversion cycle.

d.
Discuss how management might be able to reduce the cash conversion cycle (be brief).

P2. Inventory Financing
Raymond Manufacturing faces a liquidity crisis – it needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured short-term lender. The firm’s accounts receivable are quite low, but its inventory is considered liquid and reasonable good collateral. The book value of the inventory is $300,000, of which $120,000 is finished goods. (Assume a 365-day year.)

1) City-Wide Bank will make a $100,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 12% on the outstanding loan balance plus a 0.25% administrative fee levied against the $100,000 initial loan amount. Because is will be liquidated as inventory is sold, the average amount owed over the month is expected to be $75,000.

2) Sun State Bank will lend $100,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 13%

3) Citizens’ Bank and Trust will lend $100,000 against a warehouse receipt on the finished goods inventory and charge 15% annual interest on the outstanding loan balance. A 0.5% warehousing fee will be leived against the average amount borrowed. Because the loan will be liquidated as inventory is sold, the average loan balance is expected to be $60,000.

a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $100,000.

b. Which plan do you recommend? Why?

c. If the firm had made a purchase of $100,000 for which it had been given terms of 2/10 net 30, would it increase the firm’s profitability to give up the discount and not borrow as recommended in part b? Why or why not?