1. Company X sells on a 1/30, net 60 basis.

Customer Y buys goods invoiced at

$1,000.
How much can Y deduct from the bill if Y pays on day 30?

Y will get a 1% discount = $1,000 1% = $10

What is the effective annual rate of interest if Y pays on the due date rather than on
day 30?

EAR = ((1+ discount percent)365/credit period 1), or 1.01365/30 1

= 12.87 %.

How would you expect payment terms to change if

1. The goods are perishable.

The Extent to Which the Goods Are Perishable. If the collateral values of the
goods are low and cannot be sustained for long periods, less credit will be
granted.

2. The goods are not rapidly resold.

More credit would be granted

3. The goods are sold to high-risk firms.

A firm whose customers are in high risk businesses may find itself offering
restrictive credit terms, therefore less credit will be granted.

2. Indicate whether the following corporate actions Increase, Decrease, or cause no

change to the cash position.
Cash is paid for raw materials purchased for inventory - Decrease
A dividend is paid - Decrease
Merchandise is sold on Credit No Change
Common Stock is issued - Increase
Raw material is purchased for Inventory on Credit No Change
A piece of machinery is purchased and paid for with long term debt No Change
Payments for previous sales are collected - Increase
Accumulated depreciation is increased - No Change
Merchandise is sold for cash - Increase
Payment is made for a pervious purchase - Decrease
 3. A companys weekly cash position is as follows:
Week 1 $24,000
Week 2 $34,000
Week 3 $10,000
Week 4 $15,000
The annual interest rate for investments is 12% what return can the company earn on
these weekly investments

4. A company with most of its customers in New York, has decided to consider using
a lock box to help improve its cash flow. The bank has indicated it will be able to
reduce the companys collection float by 3 days. Given the following details should
the lock box option be used
Average number of payments per day in new York is 150
Average value of each payment is $15,000
Fixed annual lock box fee is $80,000
Transactional fee for lock box use is $.50 per payment
Money market Investment has a interest rate of 7.5%

5. Given the details below use the initial case matrix to do the following:
a. Construct a cash budget for Lawrence

Please see the attached excel sheet

The cash balance is based on the following assumption:

The Sales pattern is valid for all years

b. Tell me what is the largest amount of bank debt needed and when is it needed (5
points each). Circle them in the initial use case on the borrowing line of the matrix

No bank debt would be needed as can be seen from the attached cash budget

c. What is the largest amount of surplus cash flow generated by Lawrence and when
does it happen? (5 points each). Circle them in the initial use case on the net gain cash
line of the matrix
 The largest amount of surplus cash flow generated by Lawrence is $7,434,000,
and it occurs in December

Lawrence is analyzing the nature of its cash flows to formulate a proposal for
a new credit management policy.

The pattern of its sales is as follows: January through July and December at
$1,000,000; August at $2,000,000, September and November $3,000,000, and
October at $4,000,000.

Cash received on sales amounts to 10 percent in the current

month of sales, 70 percent in the month following the sales.

Obligations for labor, both direct and indirect, incurred each month are $10,000 per
month plus 20 percent of sales in the current month plus 10 percent of
sales in the following month.

Raw materials purchases are $30,000 plus 20 percent of next months sales.

Salaries for general administrative expenses are $6000 per month.

Selling expenses are 10 percent of current monthly sales.

Depreciation charges are $5000 per month.

Estimated quarterly income tax payments of $11,000 are paid in January, April, July,
and October and are one-fourth of the estimated annual current profits.

1. Cash on hand on January 1 is $50,000.

2. A minimum cash balance of $20,000 needs to be maintained for transaction

purposes.

6. Given the new details below use the revised case matrix to do the following:
Construct a revised cash budget for Lawrence

Please see the attached excel sheet

The cash balance is based on the following assumption:

The Sales pattern is valid for all years

Cash Receipts are based upon the following:

45% in the month of sale

45% in the month following sale
10% + 5% penalty on balances due in the third month

Tell me what is the largest amount of bank debt needed and when is it needed.
Circle them in the initial use case on the borrowing line of the matrix

No bank debt would be needed as can be seen from the attached cash budget

What is the largest amount of surplus cash flow generated by Lawrence and when
does it happen? Circle them in the initial use case on the net gain cash line of the
matrix.

The largest amount of surplus cash flow generated by Lawrence is $7,534,000,

and it occurs in December

On the back of the revised case matrix tell me if this revision in credit policy is a
good idea and explain why

The proposed credit policy is a good idea because it will result in an ending cash
balance of $7,534,000 (compared to $7,454,000 under the original policy), this is
in addition to the fact that it will encourage customers to pay faster so to benefit
from the discount. Those funds, however would result in the company having
more cash earlier in the sales (45% in the month of sale as opposed to 10% in the
original policy); the funds can be reinvested to earn the company more cash.

The pattern of its sales is as follows: January through July, and December at
$1,000,000; August at $2,000,000, September and November $3,000,000, and
October at $4,000,000.

The company wants to institute a new credit policy that is 5/10 net 30. Furthermore
all receivable over 30 days delinquent will be assessed a 5% penalty. It is believed
that the revised pattern for Cash received on sales will amount to 45 percent in the
current month of sales, 45 percent in the month following the sales.

Obligations for labor, both direct and indirect, incurred each month are $10,000 per
month plus 20 percent of sales in the current month plus 10 percent of
sales in the following month.

Raw materials purchases are $30,000 plus 20 percent of next months sales.

Salaries for general administrative expenses are $6000 per month.

 Selling expenses are 10 percent of current monthly sales.

Depreciation charges are $5000 per month.

Estimated quarterly income tax payments of $11,000 are paid in January,

April, July, and October and are one-fourth of the estimated annual current
profits.

Cash on hand on January 1 is $50,000.

A minimum cash balance of $20,000 needs to be maintained for transaction

purposes