Capers, Inc. has just promoted me to Chief financial officer. Since this is a new office in

Question:

Capers, Inc. has just promoted me to Chief financial officer. Since this is a new office in the company, I am understaffed and many of the responsibilities have been assigned to me.

The first task I have been assigned concerns the cash conversion cycle. My boss has asked that I examine the following data:

1. Inventory conversion period is 60 Days

2. Payables deferral period is 30 days

3. Receivables collection period of 40 days

The second task concerns the cost of bank loans under differing conditions. Specifically:

1. The company needs $1,500,000 for a new project.

2. The loan will cost 10% simple interest, for 4 months, with a 20% compensating balance.

Required:

1. What is the firm's cash conversion cycle?

2. How many times per year is the firm's inventory turnover, if sales are $4,000,000 per year?

3. If sales are all credit sales and amount to $4,000,000 per year, what is the firm's average investment in receivables?

4. What is the nominal interest rate on the loan?

Cash Conversion Cycle
Cash conversion cycle measures the total time a business takes to convert its cash on hand to produce, pay its suppliers, sell to its customers and collect cash from its customers. The process starts with purchasing of raw materials from suppliers,...