The manager of the Bank of Mount Royal just phoned Daniel and offered the company same-day deposit for their cheques; this will reduce their availability float to one business day. The fee for this service will be $3,000 per year. Nathan and Daniel must decide whether this is a good deal or not. At the end of the business week, the partners ordered a large pizza and went to Nathan’s place to hash out their decision. They came up with the following list of questions: What are the company’s inventory period, receivables period, and payables period? (Round all periods to the nearest integer.) What are the company’s operating and cash cycles? How do the company’s operating and cash cycles compare to the industry average of 30 and 20 days, respectively?
The manager of the Bank of Mount Royal just phoned Daniel and offered the company same-day deposit for their cheques; this will reduce their availability float to one business day. The fee for this service will be $3,000 per year. Nathan and Daniel must decide whether this is a good deal or not. At the end of the business week, the partners ordered a large pizza and went to Nathan’s place to hash out their decision. They came up with the following list of questions: What are the company’s inventory period, receivables period, and payables period? (Round all periods to the nearest integer.) What are the company’s operating and cash cycles? How do the company’s operating and cash cycles compare to the industry average of 30 and 20 days, respectively?
Chapter11: Investor Losses
Section: Chapter Questions
Problem 23DQ
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The manager of the Bank of Mount Royal just phoned Daniel and offered the company same-day deposit for their cheques; this will reduce their availability float to one business day. The fee for this service will be $3,000 per year.
Nathan and Daniel must decide whether this is a good deal or not. At the end of the business week, the partners ordered a large pizza and went to Nathan’s place to hash out their decision. They came up with the following list of questions:
- What are the company’s inventory period, receivables period, and payables period? (Round all periods to the nearest integer.)
- What are the company’s operating and cash cycles?
- How do the company’s operating and cash cycles compare to the industry average of 30 and 20 days, respectively?
- If the company’s customers’ average cash cycle and operating cycle are 30 and 40 days, respectively, what can we say about the company’s credit management policy of net 30?
- What is the company’s average daily collection float? What is its average daily disbursement float? (Use the average mail float to calculate the collection delay, use the average daily cost of goods sold to calculate the average daily disbursement float, and use the average daily credit sales to calculate the average daily collection float.
- What is the company’s net float?
- What is the effective annual interest rate on the company’s line of credit? What is the annual short-term interest expense based on this effective annual rate? Assume that the ending short-term borrowing amount is the average short-term borrowing amount. This average amount can then be multiplied with the effective annual interest rate to obtain the short-term interest expense. Note that you will need to construct the
Statement of Financial Position to find the ending short-term borrowing amount. - What will be the net float if Nathan Daniel takes up the Bank of Mount Royal’s offer for same-day deposit of their cheques?
- How much additional cash will be made available if the company takes up the Bank of Mount Royal’s offer for same-day deposit of their cheques? (Assume that on average, sales will remain at $3,500,000 each year.)
- How much does the company have to borrow from its bank to cover net float if they accept the bank’s same-day deposit offer?
11 Should the partners accept the same-day deposit offer from its bank?
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