SUB: FINANCIAL MANAGEMENT

Working Capital Management Straight Problems Exercises. 1. Working Capital Balance. Maria Clara Corporation found out the following working capital balance in its last 12 months operations. Minimum Maximum Cash 100,000 180,000 Accoiunts Receivable 300,000 500,000 Inventory 250,000 400,000 Accounts Payable 400,000 600,000 Required: Permanent current asset balance ON - Temporary current assets balance Average current assets Permanent working captal balance 5. Average working capital 2. Conservatice or Aggressive Working Capital Policy Jayson Enterprises is considering whether to pursue a restricted or relaxed current assets investment policy. The following data were assembled for analysis. Working Capital Policy Relaxed Restricted Annual sales P400 million P400 million Current assets as a % of sales 25% 10% Fixed assets P50 million P50 million Profit before interest and tax (PBIT) 40 M 40 M Debt-equity rate 50$ 50% Interest rate on debt 10% 10% The company's debt-equity rate is 50%, interest rate on debt is 10%, and tax rate is 30%. Required: What is the difference in the projected raturn on equity between the relaxed and restricted policy?Cash and marketable Securities management 1. Optimum Cash Balance. Ul forecasts cash outlays of P48 million for its next fiscal year. A financial analyst for the company has esitmated the conversion cost of coverting marketable securities from/to cash at P900 per conversion transaction and the annual operating cost of holding cash instead of marketable securities to be 8%. Presently , the company converts cash to marketable securities and vice-versa on amonthly basis. Required: using the Baumol Model, calculate the following: The optimal cash transfer The average cash balance The mumber of transafer to be made diuring the year The total cash costs at the optimal transaction level. The net advantage if the company follows the optimal cash conversion model. 2. Optimum Cash Balance. DEF Corporation uses the Mille-Orr Model to manage its cash account, Recently, someone asked how sensitive the solution for the return point and upper limit is to changes in the conversion cost, the variance of daily net cash flows, and the daily opprtunity cost rate. The values that are currently being used are a P50 conversion cost, a P2 million daily net cash flow variance, and a 10% annual opportunity cost. Required: Calculate the following 1. The return point 2 The upper limit using the current values 3. Effective Interest Rate. EIR Corporation wants to raise P5 million thoriugh short-term borrowing. The company gathered date from several banks and financing institutions and assembled the following: Lending Institutions A B C D E Amounts to be borrowed P5 M P5 M P5 M P5 M P5 M Nominal interest rate 10% 12%, discounted 11.5% 14% 15%, discounted Compensating balance none 5% 4% None 10% Average deposit balance even if the loan is not granted none none none none P200,000 Term of the loan 1 yr. 1 Yr. 1 yr. 1 yr. 1 yr. Interest on compensating balance N/A 6% 6% 6% 6% Required: For each of the terms of the loan offered by the lending institutions, caculate the effective interest rate. 4. Effective Interest Rate, Contiuing Basis A local bank has just approved a discounted 90-day, P200,000, 12% per annum line of credit to VJ Company. VJ plans to regularly avail of the credit line throughtout the year. Determine the following A. . Arbitrage pricing rate B. Periodic effective borrowing rate C. Compounded arbitrage pricing rate 5. Cash Flows management Float. T Company has daily cash receipts of P85,000. A recent analysis of its collection indicated that customers' payment were in the mail an average of 2.5 days. Once received, the payments are processed on 1.5 days. After payments are deposited, it takes an average of three days for these receipts to clear the banking system. Required: 1. How much collection float (in days) does the firm currently have? 2. If the firm's opportunity cost is 11%, would it be economically advisable for the firm to pay at an annual of P16,500 to reduce collection float by four days. B. Lockbox System. A firm that has an opportunity cost of 9% is contemplating installation of a lockbox system at an annual cost of P90,000. the system is expected to reduce mailing time by 2.5 days and reduce clearing time by 1.5 days. If the firm collects P400,000 per day, determine the net benefit (cost) of installing the lockbox system.C. Concentrating Banking, CERTS Corporation sells to national market and bills at credit customer from the Makati office. Using continuous billing system, the firm has collection of P1.2 million per day. Under consideration is a concentration banking system that would require customers to mail payment to the nearest regional office to be deposited in local banks. The company estimates that the collection period for accounts will be shortened by an average of 2.5 days under this system. The firm also estimates that annual service charges and administration costs of P300,000 will result from the proposed system. Thew frim canearn 14% on equal-risk investments. Required: 1. How much cash will be made available for other uses if the firm accepts the proposed concentration banking system. 2. What saving will the firm realize on the 2.5-day reduction in the collection period? 3. The net benefit (cost) of the concentration banking. D. Direct sends. South Star Corporation just received a check in the amount of P800,000 from a customer in Baguio city. If the firm processes the check in the normal manner, the funds wil become available in 7 days. To speed up the process, the firm could send an employee to the bank in Baguio on which the check is drawn to present it for payment. Such action will cause the funds to become available after 3 days. If the cost of the direct send is P800 and the firm can earn 11% on thexe funds, calculate the net benefit (cost) of this system E. Controlled Disbursitisge Bulacan firm has annual cash disbursement of P300 million made continuously over the year. Although annual service and administrative costs would increase by P100,000, the firm is considering writing all disbursement checks on a small bank in Pangasinan. The firm estimates that this will allow an additional 1.5 days of cash usage. If the firm earns a return on other equally risky investment of 12%, determine the net advantage (disadvantage) of using this technique of cash disbursement. F. Playing the Float. Marikina Corporation routinely funds its checking account to cover allchecks when written. A thorough analysis of its checking account discloses that the firm could maintain an average account balance that is 25% below the current level and adequately cove all checks presented. The average account balance is currently P900,000. If the firm can earn 10% on short-term investments, what, if any, annual savings would result from maintaining the lower average account balance. G. Payroll Account Management. Toys, Inc. has a weekly payroll of P250,000 and transfers the same amount to the payroll account on the payroll date. The period checks are issued on Friday afternoon each week. In examining the checks-cashing behavior of its employees, it has found the following pattern: Business days from isse of check Percentabe of checkis cleared 20% 40 AWN- 30 10 Business days do not include Saturdays and Sundays. Average short-term investments earn 12% per year. How much savings wuld the firm generate if it funds its payroll account based on the employees check-cashing behavior? H. Zero-balance Account. R Company is considering the establishment of a zero-balance account. The firm currently maitains an average cash balance of P420,000 in its disbursements account which does not earn interest. As compensation for the bank for maintaining the zero-account balance, the firm will have to pay a monthly fee of P1,000 and maintain a P300,000 non-interest deposits in the bank. The firm currently has other deposits in the bank and can earn 12% on short-term investments. Evaluate the proposed zero-account balance