CASE 4 (20 points)

Consider the following situations:

1. Each business day, on average, a company writes checks totaling 41,627 to pay its suppliers. The usual clearing time for these checks is 3.2 days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling 59,948. The cash from the payments is available after 1.5 days. What is the amount of the net float?

(5 points)

2. A company spends 98,000 a week to pay bills and maintains a lower cash balance limit of 75,000. The standard deviation of the disbursements is 12,200. The applicable interest rate is 4.36 percent and the fixed cost of transferring funds is 38. What is the optimal initial cash balance based on the BAT model?

(5 points)

3. A firm purchases merchandise on terms of 2/15, net 40 days. It does not take discounts, and it typically pays on time, 40 days after the invoice date. Net purchases amount to 784,000 per year. Assume a 365-day year, and note that purchases are net of discounts. What are the amounts of Free trade credit and Costly trade credit the firm receives during the year?

(5 points)

4. Suppose the credit terms offered to your firm by its suppliers are 2/10, net 30 days. Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost of its non-free trade credit, using a 365-day year?