Working Capital Management

Question 1

Conservative or Aggressive
- high level of CA

NOTE : no best working capital policy

Answer 1

Conservative
- Aggressive → low level of CA

Question 2

Conservative or Aggressive
- high liquidity risk → high return (profitability

NOTE : no best working capital policy

Answer 2

Aggressive
- Conservative → low liquidity risk → low return (profitability

Question 3

Conservative or Aggressive
- rely more on current liability (higher chance of insolvency)

NOTE : no best working capital policy

Answer 3

Aggressive
- Conservative → rely more on non current liability (higher interest)

Question 4

Formula for Normal Operating Cycle

Answer 4

Age of Inventory + Age of AR

Question 5

Formula for Cash Conversion Cycle

Answer 5

Age of Inventory + Age of AR - Age of AP

Goal → to shorten CCC

Question 6

Positive float should be maximized.
- what is the other term for positive float?
- which is higher? book balance or bank balance?

Answer 6

• disbursement float
• bank balance is higher

Question 7

Formula for Optimal Cash Balance (baumol model)

Answer 7

sqrt [2DT / O]
- D = demand (annual)
- T = transaction cost (1 transaction)
- O = opportunity cost of holding cash

Transaction Cost and Opportunity Cost → must be equal

Question 8

Formula for # of Transactions

Formula for Transaction Cost

Optimal Cash Balance

Answer 8

• Demand / OCB
• # of Transactions x T per Transaction

Question 9

Formula for Average Cash

Formula for Opportunity Cost

Optimal Cash Balance

Answer 9

• OCB / 2
• Average Cash x O

Question 10

Formula for Frequency

Optimal Cash Balance

Answer 10

360 / # of Transactions

Question 11

Formula for Average AR Balance

Answer 11

Average Daily Credit Sales x Average Collection Period

Question 12

Formula for Average Investment in AR

Answer 12

Average AR balance x Variable Cost %

Question 13

Formula for Annual Return

Answer 13

difference of Average AR balance x rate of return

Question 14

Formula for Opportunity Cost

Answer 14

difference of Average Investment in AR x rate of return

almost same to annual return

Question 15

Formula for Discount to be Taken

Answer 15

new annual credit sales x discount % x % of customers who will take the discount

Question 16

Relaxing Standard / New Discount
Incremental CM + Annual Return
Less : Incremental Bad Debt Expense
Less : Opportunity Costs
Less : Discount to be Taken
= Advantage or Disadvantage

Answer 16

Yes

Question 17

Formula for EOQ

Answer 17

sqrt [2DO / C]
- D = demand (annual)
- O = ordering cost (1 order)
- C = carrying cost

Ordering Cost and Carrying Cost → must be equal

Question 18

Formula for # of Orders

Formula for Ordering Cost

EOQ

Answer 18

• Demand / EOQ
• # of Orders x O per Order

Question 19

Formula for Average Inventory

Formula for Carrying Cost

EOQ

Answer 19

• EOQ / 2 (add safety stock if any)
• Average Inventory x C per unit

Question 20

Formula for Frequency

EOQ

Answer 20

360 / # of Orders

Question 21

WHEN TO MAKE THE ORDER?
- stockout cost → opportunity cost

Formula for Safety Stock

Formula for Reorder Point

Answer 21

Safety Stock
- (Maximum LT less Average LT) x Daily Demand

Reorder Point
- Maximum LT x Daily Demand

Question 22

Formula for Stockout Cost

Answer 22

refer to notes

Question 23

Formula for Cost of Giving up Cash Discount

Answer 23

Discount % / 100% - Discount %
x
360 / Credit Period - Discount Period

Question 24

Formula for Cost of Bank Loan

Answer 24

Interest / Net Proceeds
x
360 / Loan Term

Net Proceeds
- non discounted = face value - compensating balance
- discounted = face value - interest - compensating balance

Question 25

Formula for Cost of Commercial Paper

Answer 25

Interest + Issue Costs / Net Proceeds x 360 / Paper Term ## Footnote Net Proceeds - face value - interest - issue costs

Question 26

Formula for Cost of Factoring Receivables

Answer 26

Interest + Factor's Fee / Net Proceeds x 360 / Remaining Maturity Period ## Footnote Net Proceeds - face value - interest - factor's fee - factor's holdback