Answers and Solutions Chap 3

Chapter 3 Working Capital and Cash Management
ANSWERS
3.1.
1.P124,750
2. 73 days
3.2 53 days
3.3 P43,250
3.4 P 161,000
3.5 P 4,000
3.6
1. Operating Cycle = 105
2. Cash flow cycle = 75
3.7 1,200,000
3.8 6,000
3.9 4,200
3.10 10,000
3.11
1. P35,100
2. 66,300
3.12 Aggressive strategy has P16,800 net advantage over the conservative strategy
3.13
a. Current asset ratio = 1.74 x
Net working capital = 17,000
Return on total assets = 10.00%
b. Current asset ratio = 3.64 x
Net working capital = 29,000
Return on total assets = 9.17%
c. Yes, From 1.74x to 3.64x.

d. No, because from ROA of 10% it decreases to 9.17%
3.14 0.328767
3.15 1.33 days
3.16 27,123
3.17 1. Operating Cycle = 46 days
2. Cash Conversion Cycle = 34 days
3. The amount of resources needed to support the firm’s cash conversion cycle = P888,900
3.18
1. Optimal Transaction Size
MS = P111,803.40
2. Average cash balance
= P55,901.70
3. the number of times (during the year) the company has to convert marketable securities to cash
= 447.213 times or 448 times
4. the total cost of converting marketable securities to cash
= P4,480
5. the total carrying cost of cash
= P4,472.14
WITH SOLUTIONS:
3.1
1. Working Capital = P250,000 – P125,250 = P124,750
2. Cash conversion cycle (CCC)
 COGS = P720,000/1.6 = P450,000 = Purchases
 ASP = 360/(P450,000/P100,000) = 80 days
 ACP = 360/(P720,000/P60,000) = 30 days
 APP = 360/(P450,000/P56,250) = 37 days
Therefore,
CCC = 80 + 30 – 37 = 73 days
3.2
1. Cash Conversion Cycle (CCC)
 ASP = 360/(P16.8B/P2.1B) = 45 days
 ACP = 360/(P18B/P2.4B) = 48 days
 APP = 360/(P11.25B/P1.25B) = 40 days
Therefore,
CCC = 45 + 48 – 40 = 53 days
3.3
1. Cost of an aggressive strategy for seasonal funding
Cost of short-term financing = 0.065 x P250,000 = P 16,250
Cost of long-term financing = 0.090 x 300,000 = 27,000
Total cost of aggressive strategy = P43,250
2. Cost of conservative strategy for seasonal funding

Cost of long-term financing = 0.0900 x 1,100,000 = P99,000
– Earnings on surplus balances = 0.0500 x 550,000 = 27,500
Total cost of conservative strategy = P71,500
3.4
Amount of cash collection per day P3,000,000
Multiply by: Number of days freed on the collection 1
Amount of cash free P3,000,000
Less: Increase in compensating balance 700,000
Increase in cash flow P2,300,000
Multiply by: Rate of return x 7.00%
Incremental Income P 161,000
3.5
1. How much is the advantage or disadvantage of the lockbox system offered by China?
Amount of cash freed per day P 500,000
Multiply Number of days cash is freed 2
Amount of cash freed up P1,000,000
Multiply Rate of return 10.00%
Expected return (benefit) P 100,000
Less Cost of lockbox system 96,000
Net advantage of availing the lockbox system P 4,000
2. How much is the advantage or disadvantage of the lockbox system offered by Land?
Amount of cash freed up P 840,000
Net advantage of availing the lockbox system P 2,800
3. How much is the advantage or disadvantage of the lockbox system offered by Metro?
Amount of cash freed up P 700,000
Net advantage (disadvantage) of lockbox system ( P12,000)
3.6
Days
Inventory 60
Receivables 45
1. Operating Cycle 105
Payable (30)
2. Cash flow cycle 75
3.7
Mail float 6
Processing float 3
Clearing float 2
Total float (present) 11
Float (using lockbox) 3
Savings 8
Average daily collections 150,000
Increase in average cash balance 1,200,000
3.8
Benefit - Interest income (P2*P100,000*6%) 12,000
Cost (P500*12mos) (6,000)
Net annual benefit (cost) 6,000
3.9
Savings - interest (2*P115,000*4%) 9,200
Cost (5,000)
3.10
Savings - interest (3*P100,000*5%) 15,000
Cost (P10,000-P5,000) (5,000)
3.11
Cost of short-term financing = 0.0700 x P180,000 = P12,600

3.12
Cost of short-term financing = 0.0600 x P120,000 = P 7,200
Aggressive strategy has P16,800 net advantage over the conservative strategy
3.13
a. Current asset ratio = P40,000/ P23,000 = 1.74 x
Net working capital = P40,000 - P23,000 = 17,000
Return on total assets = P6,000 / P60,000 = 10.00%
b. Current asset ratio = P40,000/ P11,000 = 3.64 x

Net working capital = P40,000 - P11,000 = 29,000
Return on total assets = P5,500 / P60,000 = 9.17%
c. Yes, From 1.74x to 3.64x.
d. No, because from ROA of 10% it decreases to 9.17%
3.14
P = (2. days) x [(P500M) (.12)] / [(1M checks) (365 days)]
= (2 x P60,000,000) / 365,000,000 checks = 0.328767
3.15
.35 = (TF days) x [(P48M) (.12)] / [(60,000 checks) (365 days)]
TF = 1.33 days
3.16
(P30,000,000 / 365 days) (3) (0.11)
= 82,191.78 x 3 x 11% = 27,123
3.17
 ASP = 360/(P4,374,000/P72,900) = 6 days
 ACP = 360/(P13,500,000*0.80/P1,200,000) = 40 days
 APP = 360/(P19,200,000*0.60/384,000) = 12 days
1. Operating Cycle = 6 + 40 = 46 days
2. Cash Conversion Cycle = 6 + 40 – 12 = 34 days
3. The amount of resources needed to support the firm’s cash conversion cycle = P888,900
Inventory = P4,374,000 x (6/360) = P72,900

AR = P13,500,000 x 0.80 x (40/360) = P1,200,000
Less AP = P19,200,000 x 0.60 x (12/360) = P384,000
Resource Invested = P888,900
3.18
1. Optimal Transaction Size
MS =√2 × 12,500,000 × 4 ×30 / 0.08
MS = P111,803.40
2. Average cash balance

MS/2 = P111,803.40/2 = P55,901.70
3. the number of times (during the year) the company has to convert marketable securities to cash
= P12,500,000 x 4 / P111,803.40
= 447.213 times or 448 times
4. the total cost of converting marketable securities to cash

= 447.213 times x 10 = P4,472.13, or
= 448 times x 10 = P4,480
5. the total carrying cost of cash

= (P111,803.40/2) x 0.08 = P4,472.14

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Chapter 3 Working Capital and Cash Management

1. Operating Cycle = 105

2. Cash flow cycle = 75

a. Current asset ratio = 1.74 x

Net working capital = 17,000

Return on total assets = 10.00%

b. Current asset ratio = 3.64 x

Net working capital = 29,000

Return on total assets = 9.17%

c. Yes, From 1.74x to 3.64x.

3.15 1.33 days

3.17 1. Operating Cycle = 46 days

2. Cash Conversion Cycle = 34 days

1. Optimal Transaction Size

2. Average cash balance

= 447.213 times or 448 times

4. the total cost of converting marketable securities to cash

5. the total carrying cost of cash

2. Cost of conservative strategy for seasonal funding

2. Cost of conservative strategy for seasonal funding

b. Current asset ratio = P40,000/ P11,000 = 3.64 x

c. Yes, From 1.74x to 3.64x.

d. No, because from ROA of 10% it decreases to 9.17%

Inventory = P4,374,000 x (6/360) = P72,900

2. Average cash balance

4. the total cost of converting marketable securities to cash

5. the total carrying cost of cash

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