Working Capital

Working Capital Management Part 1

1. The 2016 sales of Reign Co. amounted to P8 million. The dividend ratio is 30%. The percent of sales in each alance sheet item that varies directl! "ith sales are e#pected to e as follo"s$

Cash

8%

Receivales

1%

&nventories

16%

'et fi#ed assets

30%

 (ccounts Pa!ale

12%

 (ccrued e#penses e#penses

6%

'et profit rate

)%

Re*uired$

a. +upposed that in 201, sales increased ! 20% percent over 2016 sales. -o" much additional e#ternal/ capital "ill e re*uired

. hat "ould happen to capital re*uirements if Reign can increase it sales ! 30% and the pa!out ratio is increased to 0%

2. ear &nc.4 has P8004000 in current assets4 P3040004 of "hich are considered permanent current assets. &n addition4 the firm has P6004000 invested in fi#ed assets.

a. ear "ishes to finance to al fi#ed assets and half of its permanent current assets "ith long5term financing costing 10 percent. +hort5term financing currentl! costs  percent. ears

earnings efore interests and t6a#es are P2004000. 7etermine ears earnings after ta#es under financing plan. The ta# rate is 30 percent.

. (s an alternative4 ear might "ish to final all fi#es assets and permanent current assets plus half of its temporar! current assets "ith long5term financing. The same interest rates appl! as in part a. arnings efore interest and ta#es "ill e P2004000. hat "ill e ears earnings after ta#es The ta# rate is 30 percent.

c. hat are some of the ris9s and costs considerations associated "ith each of these alternative financing strategies

3. The management of Rica Co. anticipates P124004000 in cash outla!s during the coming !ear. The firm has determined that it costs P, to convert mar9etale securities to cash and vice versa. The mar9etale securities portfolio currentl! earns an 12% annual rate return.

Re*uired$ 1/ hat is the optimal transaction si:e ;T+/ cash.

2/ Compute the total cost of the

. Palma Compan! uses a continuous illing s!stem that results in average dail! receipts of P,04000. The compan! treasurer estimates that a proposed loc95o# s!stem could reduce its collection time ! 3 da!s.

a. -o" much cash "ould the loc95o# s!stem free up for the compan!

. hat is the ma#imum amount that Palma "ould e "illing to pa! for the loc95o# s!stem if it can earn 6 percent on availale short5term funds

c. &f the loc95o# s!stem could e arranged at an annual costs of P40004 "hat "ould e the net gain from instituting the s!stem

. (merican Products is concerned aout managing cash efficientl!. efficientl!. ;n the average4 inventories have an age of )0 da!s4 and accounts receivale are collected in 60 da!s. (ccounts pa!ale are paid appro#imatel! 30 da!s after the! arise. The firm spends P30 million on operating
a. Calculate the firms operating c!cle.

. Calculate the firms cash conversion c!cle.

c. Calculate the amount of resources needed to support the firms cash conversion c!cle.

d. 7iscuss ho" management might e ale to reduce the cash conversion c!cle