Question #1 (15 marks)

When the Copper Corporation buys inventory, it must often rely on short-term bank financing to pay for the goods. Bank financing is usually in the form of a short-term self-liquidating loan, where the amount outstanding increases when goods are paid for and decreases when cash is received from sales. Coppers bank charges interest at prime (7%) plus 1%.

Consider the following example.

November 1 Buy inventory for $10,000

December 1 Pay supplier / borrow $10,000

January 30 Sell goods for $20,000

March 15 Collect receivables, $20,000, and repay loan, $10,000

• Copper buys and receives $10,000 worth of inventory on November 1.
• The suppliers invoice is due on December 1.
• Copper expects to sell the goods about January 30, say for $20,000.
• Copper expects to receive the cash about March 15.
• Accordingly, Copper would borrow $10,000 on December 1 in order to pay the supplier. It would repay the loan on March 15, when the cash becomes available.
  1. What is the inventory holding period? (2 marks)
  2. What is the receivables collection period? (2 marks)
  3. What is the operating cycle? (2 marks)
  4. What is the payables payment period? (2 marks)
  5. What is the cash conversion cycle? (2 marks)
  6. Calculate Copper interest expense in this situation. (2 marks)
  7. Explain 3 ways in which Cooper can reduce its interest charges with better management of its operating cycle. (3 marks)