I have three specific questions that I did not answer correctly that I do not understand quite how to fix. The questions and my incorrect answers are pasted below. The comments in BOLD are from the assessor for each question.

Question ONE:

CASH CONVERSION CYCLE Zocco Corporation has an inventory conversion period of 75 days, an average collection period of 38 days, and a payables deferral period of 30 days.

What is the length of the cash conversion cycle?

• 75 days inventory conversion + 38 days collection 30 days payable = 83 Days (Correct)
• IfZoccosannualsalesare$3,421,875andallsalesareoncredit,whatistheinvestmentinaccountsreceivable?
• 38 days collection period x 3421875 annual sales/365 = $356,250 Zoccos investment in accounts receivable (Correct)

How many times per year does Zocco turn over its inventory? Assume that cost of goods sold is 75% of sales.

34218758 x 75% = 2566406 Cost of goods sold

3421875 annual sales/ 2566406 cost of goods sold = 1.33 times inventory turns over in the year

Not correct. First need to compute inventory balance from the inventory conversion period. Then you can compute the inventory turnover using the inventory balance.

Question Two

17.1 AFN EQUATIONCarter Corporations sales are expected to increase from $5 million in 2012 to $6 million in 2013, or by 20%. Its assets totaled $3 million at the end of 2012. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2012, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 5%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.

Answer

a) AFN=$310,000

Increase in assets= (3,000,000/5,000,000) x 1,000,000 = 600,000

Spontaneous increase in payables/accruals= (1,000,000/5,000,000) x 1,000,000 = 200,000

Funds obtained by retained earnings = (.05) (6,000,000) (.30) = 90,000

600,000 - 200,000 90,000 = 310,000

AFN is incorrect. Need to review the formula. Spontaneous increase in liabilities as well increase in retained earnings are incorrect. See section 17-3 for AFN examples.

Question THREE

Refer to problem 17-1. The company's executive team is very concerned about funding growth with new debt, given the existing liabilities. What strategies might the company consider to reduce its AFN? (12 paragraphs)

Answer

a) In order to reduce the AFN, the company can consider 1) reducing the projected increase in assets, 2) increasing retained earnings, 3) improving the profit margin, or 4) effecting change in more than one factor of the calculation.

The above calculation for the $310 AFN is based on 20% growth. Lowering the growth lowers the AFN. Based on calculations, if the company held to 10% growth with the other figures remaining constant, the AFN would be $117,500. At 5% growth, the company would approach a nearly zero AFN or sustainable growth with an AFN of only $21,250. At 3.5% growth, the company would approach a negative AFN.

(.6) (500,000) (.2) (1,000,000) (.05) (500,000) (.05) (5,500,000) (.30)

300 ,000 100,000 82,500 = 117,000

(.6) (250,000) (.2) (1,000,000) (.05) (250,000) (.05) (5,250,000) (.30)

150,000 -50,000 78,750 = 21,250

Another strategy to reduce the AFN is to increase retained earnings by increasing the dividend payout. While the problem does not describe what the dividend payouts are, assuming that the dividends are increased such that retained earnings represent 40% (120,000) rather than 30% (90,000) and all other factors remain the same, the AFN would be $280,000.

Funds obtained by retained earnings = (.05) (6,000,000) (.40) = 120,000

(.6) (1,000,000) (.2) (1,000,000) (.05) (6,000,000) (.4)

600,000 200,000 120,000 = 280,000

If it is possible to renegotiate contracts with vendors to lower costs, then it is possible to increase the profit margin and therefore increase retained earnings. If the profit margin could be increased to .06 from the current .05 for example, with all other factors remaining equal, the retained earnings would increase from $90,000 to $108,000 and the APN would be $292,000 instead of $310,000.

Funds obtained by retained earnings = (.06) (6,000,000) (.30) = 108,000

(.6) (1,000,000) (.2) (1,000,000) (.06) (6,000,000) (.3)

600,000 200,000 108,000 = 292,000

Lastly, the company could look at improving two factors, such as limiting growth to 10% while improving the profit margin to 6%. In this scenario, the AFN would be reduced from $310,000 to $101,000.

(.6) (500,000) (.2) (1,000,000) (.05) (500,000) (.06) (5,500,000) (.30)

300 ,000 100,000 99,000 = 101,000

Incorrect AFN computation affects the calculations shown in this part. Needs to be redone based on corrected LO 5.1