QUESTION ONE Some firms finance their permanent working capital with short term liabilities (commercial paper and short term notes) Explain the impact of this decision on the profitability and risk of these firms Suppose that a firm finances its seasonal (temporary) current assets with long term funds What is the impact of this decision on the profitability and risk of this firm QUESTION TWO Filter Company is a distributor of air filters to retail stores It buys its filters from several manufacturers Filters are ordered in lot sizes of 1,000, and each order costs $ 40 to place Demand from retail stores is 20,000 filters per month, and carrying cost is $0 10 a filter per month (25 marks) a What is the optimal order quantity with respect to so many lot sizes (that is, what multiple of 1,000 units should be ordered) b What would be the optimal order quantity if the carrying cost were cut in half to $0 05 a filter per month c What would be the optimal order quantity if ordering costs were reduced to $10 per order QUESTION THREE Under what conditions would it be possible for a company to hold no cash or marketable securities Are these conditions realistic (10 marks) Risk associated with the amount of current assets is generally assumed to decrease with increased levels of current assets Is this assumption always correct for all levels of current assets in particular, for an excessively high level of current assets relative to the firms needs Explain (15 marks) QUESTION FOUR UNES bookstore is attempting to determine the optimal order quantity for a popular book in Financial Management The store sells 5,000 copies of this book a year at a retail price of Kshs 1,250, and the cost to the store is 20 percent less, which represents the discount from the publisher The store figures that it costs Kshs 100 per year to carry a book in inventory and Kshs 10,000 to prepare an order for new books (25 marks) a Determine the total inventory costs associated with ordering 1, 2, 5, 10, and 20 times a year b Determine the economic order quantity c What implicit assumptions are being made about the annual sales rate

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 07, 2024

QUESTION ONE Some firms finance their permanent working capital with short-term liabilities (commercial paper and short-term notes). Explain the impact of this decision on the

QUESTION ONE

Some firms finance their permanent working capital with short-term liabilities (commercial paper and short-term notes). Explain the impact of this decision on the profitability and risk of these firms.
Suppose that a firm finances its seasonal (temporary) current assets with long-term funds. What is the impact of this decision on the profitability and risk of this firm?

QUESTION TWO

Filter Company is a distributor of air filters to retail stores. It buys its filters from several manufacturers. Filters are ordered in lot sizes of 1,000, and each order costs $ 40 to place. Demand from retail stores is 20,000 filters per month, and carrying cost is $0.10 a filter per month. (25 marks)

a. What is the optimal order quantity with respect to so many lot sizes (that is, what multiple of 1,000 units should be ordered)?

b. What would be the optimal order quantity if the carrying cost were cut in half to $0.05 a filter per month?

c. What would be the optimal order quantity if ordering costs were reduced to $10 per order?

QUESTION THREE

Under what conditions would it be possible for a company to hold no cash or marketable securities? Are these conditions realistic? (10 marks)
Risk associated with the amount of current assets is generally assumed to decrease with increased levels of current assets. Is this assumption always correct for all levels of current assets in particular, for an excessively high level of current assets relative to the firms needs? Explain.(15 marks)

QUESTION FOUR

UNES bookstore is attempting to determine the optimal order quantity for a popular book in Financial Management. The store sells 5,000 copies of this book a year at a retail price of Kshs 1,250, and the cost to the store is 20 percent less, which represents the discount from the publisher. The store figures that it costs Kshs 100 per year to carry a book in inventory and Kshs 10,000 to prepare an order for new books.(25 marks)

a. Determine the total inventory costs associated with ordering 1, 2, 5, 10, and 20 times a year.

b. Determine the economic order quantity.

c. What implicit assumptions are being made about the annual sales rate?