Financial Management

(B. Working Capital Management)

B. WORKING CAPITAL MANAGEMENT A. Increase in the ratio of current l iabilities to noncurrent liabilities.
B. Increase in the operating cycle.
C. Decrease in the operating cycle.
THEORIES: D. Increase in the ratio of current assets to current
current liabilities.
Working capital management
1. Working capital
tal management involves
involves investment
investment and financing decisions
decisions related
related to: Moderate
A. plant and equipment
equipment and current liabilities.
liabilities. 3. Short-term financing
financing plans
plans with high liquidity have:
B. current assets
assets and capital
capital structure.
structure. A. high return and high risk
C. current assets
assets and current
current liabilities.
liabilities. B. moderate return and and moderate
moderate risk
D. sales and credit. C. low profit
profit and low risk
risk
D. none of thethe above
above
17. The goal of managing working
working capital, such as inventory,
inventory, should be to minimize the:
A. costs of carrying
carrying inventory Temporary & Permanent working capital
B. opportunity cost of capital
capital 4. Temporary working capital supports
C. aggregate of carrying and shortage costs A. the cash needs of the
the company. C. acquisition of capital
capital equipment.
D. amount of spoilage or pilferage
pilferage B. payment of long
long term debt. D. seasonal peaks.

Working capital financing policy Cash Management

Aggressive Motives for holding cash
5. Zap Company follows
follows an aggressive
aggressive financing policy in its working
working capital management
management while 7. The transaction
transaction motive for holding
holding cash is for:
Zing Corporation follows
follows a conservative financing
financing policy. Which one of the following A. a safety cushion C. compensating balance
balance requirements
requirements
statements is correct? B. daily operating requirements D. none of the above
A. Zap has low ratio of short -term debt to total debt while Zing has a high ratio of short-
term debt to total debt. Float
B. Zap has a low current ratio while Zing has a high current
current ratio. 8. The difference between the cash balance on the firm's books and the balance shown on the
C. Zap has less liquidity risk while Zing has more
more liquidity risk. bank statement is called:
D. Zap finances short-term assets with long-term debt while Zing finances short-term A, the compensating balance
balance C. a safety cushion
cushion
assets with short-term debt. B. float D. none of the above

6. Which of the following would increase

increase risk?
risk? Cash conversion cycle
A. Raise the level of working
working capital. 9. The length of time between
between payment for inventory
inventory and the collection
collection of cash is referred to as:
B. Decrease the amount
amount of inventory by formulating an effective
effective inventory policy.
policy. A. payables deferral
deferral period C. operating cycle
cycle
C. Increase the amount of short-term borrowing. B. receivables conversion period D. cash conversion cycle
D. Increase the amount of equity financing.
financing.
10. As a firm's cash conversion
conversion cycle increases,
increases, the firm:
Conservative A. becomes less profitable
profitable
2. As a company becomes more conservative with respect to working capital policy, it would B. increases its investment
investment in working
working capital
capital
tend to have a(n) C. reduces its accounts payable period

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D. incurs more shortage

shortage costs D. Increases by the number of units of the safety stock.

11. The longer the firm's accounts

accounts payable period, the: 19. Which of the following statements is correct for a firm that currently has total costs of carrying
A. longer the firm's cash conversion cycle is. and ordering inventory that are 50% higher than total carrying costs?
B. shorter the firm's inventory period is. A. Current order size
size is greater than optimal
C. more the delay in the accounts receivable period. B. Current order
order size is less than optimal
D. less the firm must invest in working capital.
capital. C. Per unit carrying
carrying costs
costs are too high
D. The optimal order
order size is currently being
being used
12. The average length of time a peso is tied up in current asset
asset is called the:
A. net working capital.
capital. C. receivables conversion period. Trade credit
B. inventory conversion period. D. cash conversion period. 20. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
date?
A. Three days after the invoice is received.
received.
Receivables management B. The 8th day is the customer’s decision
decision date.
13. All of these factors are used in credit policy administration
administration except:
except: C. Anytime during
during the period,
period, 8th to the 30th.
30th.
A. credit standards C. peso amount of receivables
receivables D. The 30th day is the primary decision date.date.
B. terms of trade D. collection policy
PROBLEMS
14. Which of the following statements is most correct? If a company lowers its DSO, but no Working capital financing
changes occur in sales or operating costs, then: i. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials
A. the company might
might well end up with a higher
higher debt ratio. and variable conversion
conversion cost. It takes the firm 18 days to convert raw materials into
B. the company might well end up with a lower
lower debt ratio.
ratio. calculator. Casie’s usual credit terms extended to its customers is 30 days, and
and the firm
C. the company would probably
probably end up with a higher ROE. generally pays its suppliers in 20 days.
D. the company's total
total asset turnover ratio
ratio would probably
probably decline. If the foregoing cycles are constant, what amount of working capital must Casie Company
finance?
15. All but which of the following is considered in determining
determining credit policy? A. P1,400,000 C. P 900,000
A. Credit standards C. Accounts payable deferral period B. P2,400,000 D. P1,800,000
B. Credit limits D. Collection efforts
Cash conversion cycle
Inventory management ii. Luke Company hashas an inventory conversion period of 60 days, a receivables conversion
16. The use of safety stock
stock by a firm will: period of 45 days, and a payments cycle
cycle of 30 days. What is the length of the firm’s cash
A. reduce inventory
inventory costs C. have no effect on inventory
inventory costs
costs conversion cycle?
B. increase inventory costs D. none of the above A. 90 days C. 54 days
B. 75 days D. 105 days
18. When a specified level of safety stock is carried for an item in inventory, the average
inventory level for that item iii. The Spades Company has an inventory conversion conversion period of 75 days, a receivables
receivables
A. decreases by the amount of the safety stock. conversion period
period of 38 days, and a payable payment period of 30 days. What is the length of
B. is one-half the level of the safety stock. the firm’s cash conversion cycle?
C. Increases by one-half the amount of the safety stock. A. 83 days C. 67 days

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B. 113 days D. 45 days B. P1,912.50 D. P 188.55

iv. Samaritan Supplies,

Supplies, Inc. has P5 million in inventory and
and P2 million in accounts receivable.
receivable. Its Annual savings
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its ix. What are the expected annual
annual savings from a lock-box
lock-box system that collects 150 checks
checks per
average daily purchases are P50,000. What is the length of the company’s cash conversion day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5 days
period? respectively,
respectively, if the annual interest rate is 7%?
A. 50 days C. 30 days A. P 5,250 C. P 21,000
B. 20 days D. 40 days B. P 13,125 D. P300,000

Days inventory Receivables management

v. What is the inventory period for a firm with
with an annual cost of goods sold of P8 million, P1.5 Carrying cost
million in average inventory, and a cash conversion cycle of 75 days? x. The Camp Company has an inventory conversion period of 60 days, a receivable
A. 6.56 days C. 52.60 days conversion period of 30 days, and a payable payment period of 45 days. days. The Camp’s
B. 18.75 days D. 67.50 days variable cost ratio is 60 percent and annual fixed costs
costs of P600,000. The current cost of
capital for Camp is 12%.
vi. Samaritan Supplies,
Supplies, Inc. has P5 million in inventory and
and P2 million in accounts
accounts receivable. Its If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carrying
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its cost on accounts receivable, using 360 days year?
average daily purchases are P50,000. What is the length of the co mpany’s inventory A. P281,250 C. P 20,250
conversion period? B. P168,750 D. P 56,250
A. 50 days C. 120 days
B. 90 days D. 40 days Average receivables
xi. Caja Company sells on terms 3/10, net net 30. Total sales for the year are P900,000. Forty
Cash management percent of the customers pay on the tenth day and take discounts; the other 60 percent pay,
Economic conversion quantity (ECQ) on average, 45 days after their purchases.
vii. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid What is the average amount of receivables?
uniformly. Simile has the opportunity to invest the money at 24% per annum. The company A. P70,000 C. P77,200
spends, on the average, P40 for every cash conversion to marketable securities. B. P77,500 D. P67,500
What is the optimal cash conversion size?
A. P60,000 C. P45,000 xii. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are
B. P55,000 D. P72,500 expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation of
credit standards will increase credit sales by 20% and increase the average collection period
Opportunity cost from 30 days to 40 days.
days. Based on a 360-day year, the proposed relaxation of credit to
viii. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which standards will result in an expected increase in the average accounts receivable balance of
are to be paid uniformly. Hyperbole has the opportunity to invest the money at 9% per A. P 540,000 C. P2,700,000
annum. The company spends, on the average, P25 for every cash conversion to marketable B. P 900,000 D. P1,620,000
securities and vice versa.
What is the opportunity cost of keeping cash in the bank account? Investment in receivables
A. P3,825.00 C. P4,190.00 xiii. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection

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(B. Working Capital Management)

period is 45 days, and bad debts are 3 percent of sales. The credit and collection manager xvii. What is the economic order quantity for the following inventory policy: A firm sells 32,000 bags
is considering instituting a stricter collection policy, whereby bad debts would be reduced to of premium sugar per year. The cost per order is P200 and the firm experiences a carrying
1.5 percent of total sales, and the average collection
collection period would fall to 30 days. However, cost of P0.80 per bag.
sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of A. 2,000 bags C. 8,000 bags
sales and the cost of carrying receivables
receivables is 10 percent. Assume a tax rate of 40 percent
percent B. 4,000 bags D. 16,000 bags
and 360 days per year.
What would be the decrease in investment in receivables if the change were made? Annual demand
A. P 9,688 C. P 96,875 xviii. Marsman Co. has determined t he following for a given year:
B. P 12,988 D. P129,975 Economic order quantity (standard order size) 5,000 units
Total cost to place purchase orders for the year P40,000
Comprehensive Cost to place one purchase order P 100
Question Nos. 14 through 16 are based on the following data: Cost to carry one unit for one year P 4
Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in What is Marsman’s estimated annual usage in units?
order to speed collections. At present, 40 percent of Sonata Company‘s customers take the 2 A. 1,000,000 C. 500,000
percent discount. Under the new term, discount customers are expected to rise to 50 percent. B. 2,000,000 D. 1,500,000
Regardless of the credit terms, half of the customers who do not take the discount are expected
to pay on time, whereas the remainder will pay 10 days late. The change does not involve a Required annual return on investment
relaxation of credit standards; therefore bad debt losses are not expected to rise above their xix. BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which sells
present 2 percent level. However, the more generous cash cash discount terms are expected to blank and recorded videos. Pirate Mart purchases tapes from BIBO Company at P300.00
increase sales from P2 million to P2.6 million per year. Sonata Company’s
Compan y’s variable cost ratio is per tape; tapes are shipped in packages of 20. BIBO Company pays all incoming freight,
75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s and Pirate Mart does not inspect the tapes due to BIBO Company's reputation for high
income tax rate is 40 percent. quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Mart
earns 20% on its cash investments. The purchase-order lead time is two weeks.
xiv. What are the days sales outstanding (DSO) before and after the change of credit policy? The following cost data are available:
A. 27.0 days and 22.5 days, respectively
respectively C. 22.5 days and 21.5 days, respectively
respectively Relevant ordering costs per purchase order P80 P90.50
B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively Carrying costs per package per year 3
Relevant insurance, materials handling, breakage, etc., per year 2 P 4.50
What is the required annual return on investment per package?
xv. The incremental carrying cost
cost on receivable is A. P6,000 C. P1,200
A. P 843.75 C. P 643.75 B. P 250 D. P 600
B. P8,889.00 D. P6,667.00
Order quantity
xvi. The incremental after tax profit from the change in credit terms is xx. For Raw Material L12, a company maintains a safety stock stock of 5,000 pounds. Its average
A. P68,493 C. P60,615 inventory (taking into account the safety stock) is 12,000 pounds. What is the apparent order
B. P65,640 D. P57,615 quantity?
A. 18,000 lbs. C. 14,000 lbs.
Inventory management B. 6,000 lbs. D. 24,000 lbs
EOQ

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Optimal safety stock level A. P19,550 C. P38,300

xxi. Each stockout of a product sold by Arnis Co. co sts P1,750 per occurrence. The company’s B. P18,750 D. P62,500
carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
product 20 times a year at a cost of P100 per order.
order. The probabilities of a stockout at Maximum interest rate
various levels of safety stock are: xxiv. Narra Company
Company is considering
considering a switch to level production.
production. Cost efficiencies will occur
occur
Units of Safety Stock Probability of Stockout under level production and after tax cost would decline by P70,000 but inventory would
0. 0.50 increase from P1,000,000 to P1,800,000. Narra would have to finance the extra inventory at at
100. 0.30 a cost of 10.5 percent.
200. 0.14 What is the maximum interest rate that makes level production feasible?
300. 0.05 A. 7.00 percent C. 8.75 percent
400. 0.01 B. 5.83 percent D. 10.00 percent
The optimal safety stock level for the company based on the units of safety stock level
above is Opportunity cost
A. 200 units C. 100 units xxv. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high
B. 300 units D. 400 units selling products for the coming
coming year. Its supplier quoted a price
price of P25 per zipper.
zipper. Diesel
planned to purchase 7,500 units per month but its supplier could not guarantee this delivery
xxii. Paeng Company uses the EOQ model for inventory control.control. The company has an annual schedule. In order to ensure availability of these zippers, Diesel is considering the purchase
demand of 50,000 units for part number 6702 and has computed an optimal lot size of 6,250 of all these 90,000 units on January 1. Assuming Diesel can invest cash at 12%, the
units. Per-unit carrying
carrying costs and stockout
stockout costs are P9
P9 and P4, respectively.
respectively. The following company’s
company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is
data have been gathered in an attempt to determine an appropriate safety stock level: A. P127,500 C. P123,750
Units Short Because of Excess Number of Times Short B. P135,000 D. P264,000
Demand during the Lead Time Period in the last 40 Reorder Cycles
100 8 Trade credit
200 10 xxvi. If a firm is given a trade credit
credit terms of 2/10, net 30,
30, then the cost to the firm failing to take
300 14 the discount is:
400 8 A. 2.0%. C. 36.7%
What is the optimal safety stock level? B. 30.0%. D. 10.0%.
A. 100 units C. 200 units
B. 300 units D. 400 units xxvii. The cost
cost of discounts
discounts missed on credit
credit terms of 2/10, n/60 is
A. 2.0 percent C. 12.4 percent
Annual inventory costs B. 14.9 percent D. 21.2 percent
xxiii. Durable Furniture Company uses about 200,000 yards of a particular fabric each year. The
fabric costs P25 per yard. The current policy is to order the fabric four times a year. Bank loans
Incremental ordering costs are about P200 per order, and incremental carrying costs are Discount loan
about P0.75 per yard, much of which represents the opportunity cost of the funds tied up in xxviii. You plan to borrow
borrow P10,000
P10,000 from your bank, which offers to lend
lend you the money at a 10
inventory. percent nominal, or stated, rate on a one-year loan. What is the effective interest rate if the
How much total annual costs are associated with the current inventory policy? loan is a discount loan?
A. 10.00% C. 12.45%

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B. 11.11% D. 14.56% A. P3,624 C. P4,800

B. P1,176 D. P1,224
Discount loan with compensating balance
xxix. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% xxxiv. An invoice of a P100,000
P100,000 purchase
purchase has credit
credit terms of 1/10, n/40.
n/40. A bank loan for 8
compensating balance? Assume 360 days per year. percent can be arranged at any time. When should the customer pay the invoice?
A. 20.0% C. 17.4% A. Pay on the 1st. C. Pay on the 40th
B. 15.0% D. 22.2% B. Pay on the 10th D. Pay on the 60th

Compensating balance with interest

xxx. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual xxxv. The Peninsula Commercial Bank and Island Island Corporation
Corporation agreed to the following
following loan
interest rate 12%. As a condition of the loan, Premiere is required required to maintain a proposal:
compensating balance of P300,000 in its checking account. The checking account earns  Stated interest rate of 10% on a one-year discounted
discounted loan; and
interest at an annual rate of 3%.
3%. Premiere would otherwise maintain only P100,000 in its  15% of the loan as compensating balance on zero-interest current account to be
checking account for transactional purposes. Premiere’s effective interest costs of the loan maintained by Island Corporation with Peninsula Commercial Bank.
is The loan requires
requires a net proceeds of P1.5 million.
llion. What is the principal amount
amount of loan applied
A. 12.00% C. 16.30% for as part of the loan agreement?
B. 14.25% D. 15.86% A. P1,666,667 C. P1,764,706
B. P2,000,000 D. P1,125,000
Add-on
xxxi. Perlas Company
Company borrowed
borrowed from a bank an amount of P1,000,000. The bank charged a
12% stated rate in an add-on arrangement, payable in 12 equal monthly installments. i. Answer: A
A. 22.15% C. 25.05% Daily working capital required: 200 x 250 50,000
B. 24.00% D. 12.70% Total working capital needed: 28 days x 50,000 1,400,000
CCC = 18 + 30 – 20 28 days
Financing alternative
xxxii. A company has accounts
accounts payable of P5 million with terms of 2% discount within 15 ii. Answer: B
days, net 30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, Cash Conversion Cycle = Ave. collection period + Inventory cycle days – Ave. Accounts
or it can wait until the 30th day when it will receive revenues to cover the payment. If it Payable payment days
borrows funds on the last day of the discount period in order to obtain the discount, its total Inventory cycle in days 60 days
cost will be Average collection period 45 days
A. P 51,000 less C. P 75,500 less Operating cycle 105 days
B. P100,000 less D. P 24,500 more Deduct Accounts payable payment days 30 days
Cash conversion cycle 75 days
xxxiii. Every 15 days
days a company
company receives P10,000 worth of raw materials from its suppliers.
The credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day iii. Answer: A
after each delivery. Thus, the company is considering a 1-year bank loan for P9,800 (98% of Inventory cycle in days 75 days
the invoice amount). If the effective annual interest rate on this loan is 12%, what will be the Average collection period 38 days
net peso savings over the year by borrowing and then taking the discount on the materials?

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Operating cycle 113 days

Deduct Accounts payable payment days 30 days xi. Answer: B
Cash conversion cycle 83 days DSO = (.4 x 10) + (.60 x 45) 31 days
Average AR: 900,000/360x31 days P77,500
iv. Answer: D
Inventory conversion period (See #4) 50.0 days xii. Answer: D
Average collection period (2M/0.1M) 20.0 days Credit sale = 40,500,000 x 80% = 32,400,000
Operating cycle 70.0 days Increased credit sales: 32,400,000 x 1.2 = 38,880,000
Less: Ave. Accounts Payable payment days (1.5M/0.5M) 30.0 days New Average AR 38,880,000/360 x 40 = 4,320,000
Cash conversion period 40.0 days Old Average AR 32,400,000/360 x 30 = 2,700,000
Increase in Average AR 1,620,000
v. Answer: D
Inventory turnover: xiii . Answer: C
Cost of goods sold/Ave. Inventory (8M/1.5M) 5.33x Change in average accounts receivables:
Inventory conversion period (360 days/5.33) 67.5 days Planned: 2,200,000/360x30 183,333
Present: 2,500,000/360x45 312,500
vi. Answer: A Decrease in AR balance 129,667
Annual sales 360 days
days x 100,000
100,000 36.0M Variable cost ratio 75%
Inventory turnover 36M/5M 7.2x Decrease in investment in AR 96,875
Inventory conversion period 360/7.2 50.0 days
xiv. Answer: A
vii. Answer: B Days’ sales outstanding
Optimal cash conversion size = (9,075,000 x 40 / 0.24)^1/2 = 55,000 Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40) 27.0 days
New policy (.5 x 10) + (.25 x 30) + (.25 x 40) 22.5 days
viii. Answer: B
OTS: (2 x P3,251,250 x P25 ÷ 0.09)^1/2 = P42,500 xv. Answer: A
Opportunity cost: P42,500 ÷ 2 x 0.09 P 1,912.50 Average receivable
New policy: 2.6M/360 x 22.5 162,500
ix. Answer: C Old policy: 2.0M/360 x 27 150,000
Reduction in cash float (2.5 + 1.5) 4.0 days Incremental Accounts Receivable 12,500
Additional free cash (4 days x 150 x P500) P300,000 Incremental carrying cost on receivable 12,500 x 0.75 x 0.09 843.75
Annual savings (P300,000 x 0.07) P 21,000
xvi. Answer: A
x. Answer: C Incremental sales 600,000
Average AR 3,375,000/360 x 30 days 281,250 Variable cost (.75 x 600,000) ( 450,000)
Average investment: 281,250 x 0.60 168,750 Additional bad debts (600,000 x 2%) ( 12,000)
Carrying cost: 168,750 x 0.12 20,250 Additional carrying cost ( 844)

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Additional discounts (2,600,000 x .5 x 03) –(2,000,000

–(2,000,000 x .4 x .02) ( 23,000) xxii . Answer: B
Before tax increase in income 114,156 The optimal safety stock level represents the level that gives the lowest sum of stock out
Less tax 45,663 costs and additional carrying costs. Based on the computation below, the lowest combined
Incremental income 68,493 costs is P3,340, corresponding to 300-unit level
First compute the stockout costs
costs based on given
given probability of demand. Starting with 100-
xvii. Answer: B unit level as safety stock, if the additional demand is 200, the company has stockout of 100
EOQ = (2 x 32,000 x 20  0.8)^1/2 = 4,000 bags units.
100: (100 x 32* x 0.25) + (200 x 32 x 0.35) + (300 x 32 x 0.20) + (100 x 9) 4,960
xviii. Answer: B 200: (100 x 32 x 0.35) + (200 x 32 x 0.20) + (200 x 9) 4,200
Number of orders made 40,000/100 400 300: (100 x 31 x 0.20) + (300 x 9) 3,340
Annual requirement 400 x 5,000 2,000,000 400: (400 x 9) 3,600
stockout per unit x 8 orders per year.
xix. Answer: C
Investment in 1 package (20 x P300) P6,000 xxiii . Answer: A
Required annual return: P6,000 x 0.2 P1,200 Ordering costs 4 x P200 800
Carrying costs (50,000 ÷ 2 x 0.75 18,750
xx. Answer: C Total 19,550
Average inventory units 12,000
Less safety units 5,000 xxiv. Answer: C
Average inventory based on EOQ 7,000 Savings in Expenses/additional Investment in Inventory = Maximum Interest Rate
Order size 7,000 x 2 14,000 70,000 / (1,800,000 – 1,000,000) = 8.75%

xxi. Answer: D xxv. Answer: C

Safety stock Stock out Costs (1) Carrying Costs @ P5 Total Number of units to be purchased
purchased in advance:
advance: 90,000 – 7,500 82,500
100 10,500 500 P11,000 Average investments in working capital: 82,500 x 0.5* x P25 1,031,250
200 4,900 1,000 5,900 Opportunity cost 1,031,250 x 0.12 123,750
300 1,750 1,500 3,250 *The average investment is one-half (82,500 + 0) ÷ 2
400 350 2,000 2,350
xxvi. Answer: C
Stockout Costs k = (2  98) x (360  20 = 36.7%
100 1750 x .30 x 20 orders = 10,500 The solution assumes that the company foregoes the discount only once during the year.
200 1750 x .05 x 20 = 4,900
xxvii. Answer: B
300 1750 x .05 x 20 = 1750
400 1750 x .01 x 20 = 350 With credit terms of 2/10, n/60 one must pay on the 10th10th day choosing to finance the net
Optimal safety stock is 400-unit level with a cost of only P2,350 cost. payment (invoice price minus the cash discount) at the rate of 2 percent for 50 days, paying
the loan on the 60th day. The annualized rate of foregoing the discount is 14.9 percent.

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k = 2/98 x 365/50 = 14.9% xxxiv. Answer: B

The cost of discounts missed is 12.3% which is more than the 8 percent that the bank
xxviii. Answer: B charges. The company should
should borrow on the 10th, pay the invoice, and finance
finance at 8% for the
k = 10 ÷ (100 – 10) = 11.11% next 30 days (pay off the bank on the 40th).
Cost of foregoing discount: (1  99) x (360  30) = 12.31%
xxix. Answer: C
Principal 200,000 xxxv. Answer; B
Less: Discount 200,000 x 0.15 x 90/360 ( 7,500) Net proceeds in pesos P1,500,000
Compensating balance ( 20,000) Divided by net proceeds percentage 1.00 – 0.1 – 0.15 0.75
Net proceeds 172,500 Principal amount P2,000,000
Effective rate: (7,500/172,500) x 360/90 17.4%

xxx. Answer: B
Interest expense 1M x 0.12 120,000
Less interest income on additional CA balance (200,000 x 0.03) 6,000
Net interest cost 114,000
Effective interest
interest rate 114,000/(1,000,000
114,000/(1,000,000 – 200,000) 14.25%

xxxi. Answer: A
Interest for 1 year 1M x 12% 120,000
Average Principal: [1M + (1M/12)] ÷ 2 541,667
Estimated effective rate 120,000/541,667
120,000/541,667 22.15%
Alternative solution for approximate effecti ve rate:
(2 x No. of payments x Interest) ÷ [(1 + No. of payments) x Principal]
(2 x 12 x P120,000) ÷ (13 x P1M) = 22.15%

xxxii. Answer: C
Discount 5M x 0.02 100,000
Interest (5M x 0.98 x 0.12) x 15/360 = 24,500
Savings = 75,500

xxxiii. Answer: A
Purchase discount 10,000 x 0.02 x 200 purchases 4,800
Interest on borrowed money 9,800 x 0.12 1,176
Savings 3,624
Number of purchases: 360 days/15-day interval 200

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