BUS 4404 Finance 2

Can someone please check my work below. Thank you.

DOLLAR BILL'S, a retail store in New York City, buys its inventory on credit.Upon purchase, it is given 30 days in which to pay its suppliers.It sells all of its merchandise on credit.It extends 60 days of credit to its customers.Its inventory turnover rate is 60 days.

Situation 1

Using the Cash Conversion Model, measure DOLLAR BILL'S financing cycle in both days and money ($US) using the following assumptions:

• Sales of $730,000
• Gross Margin of 30%
• Financing Rate 61/2%

Situation 2

Recent management decisions have had the following impact:

• DOLLAR BILL has renegotiated its credit line so that it has 35 days to pay its suppliers
• It now extends 45 days of credit to its customers,
• It has an inventory turnover rate of 45 days.

All other factors remain the same.Has DOLLAR BILL'S financing cycle improved or declined?Quantify the change in days and in dollars. Please show your work.

My answer is below:

Situation #1

We need to determine the conversion cycle.

The financing cycle is: 60 + 60 - 30 = 90 days

Cash Conversion cycle is90 days.

Monthly sale:$730,000 / 12 =$60,833

Gross margin is 30%

30% of $60,833 is$18,250

70% is$42,583cost of goods sold (COGS).

Value of inventory blocked: $42,583 x 2 =$85,166

Account receivable:$60,833 x 2 =$121,666

Value of accounts payable:$42,583 x 1 =$42,583

Net working capital:$85,166 + $121,666 - $42,583 =$164,249

Situation #2

We need to determine the conversion cycle.

The financing cycle is: 45 + 45 - 35 = 55 days

Value of the inventory: $42,583 x 1.5 =$63,875

Account receivable: $60,833 x 1.5 =$91,249

Value of the account payable: $42,583 x 1.666 = $70,943

Net working capital:$63,875 + $91,249 - $70,943 =$105,473

Overall the retail store has improved from situation #1 and situation #2 because it has taken them less days to turn their sales to cash (55 days compared to 90 days). In situation #1 the net working capital is $164,249 and for situation #2 it's $105,473. Dollar Bill's financial cycle has improved in terms of income by $58,776.