Question

Please answer 17.16 & 17.20

PART 8 Short-Term Financial Management LO 2 LO 2 LO 2 LO 2 LO 2 17.14 Trade Credit Forms. In what form is trade credit most commonly offered? What is the credit instrument in this case? 17.15 Receivables Costs. What are the costs associated with carrying receivables? What are the costs associated with not granting credit? What do we call the sum of the costs for different levels of receivables? 17.16 Five Cs of Credit. What are the five Cs of credit? Explain why each is important. 17.17 Credit Period Length. What are some of the factors that determine the length of the credit period? Why is the length of the buyer's operating cycle often considered an upper bound on the length of the credit period? 17.18 Credit Period Length. In each of the following pairings, indicate which firm would probably have a longer credit period and explain your reasoning. a. Firm A sells a miracle cure for baldness; Firm B sells toupees. b. Firm A specializes in products for landlords; Firm B specializes in products for renters. c. Firm A sells to customers with an inventory turnover of 10 times: Firm B sells to customers with an inventory turnover of 20 times. d. Firm A sells fresh fruit; Firm B sells canned fruit. e. Firm A sells and installs carpeting; Firm B sells rugs. 17.19 Inventory Types. What are the different inventory types? How do the types differ? Why are some types said to have dependent demand whereas other types are said to have independent demand? 17.20 Just-in-Time Inventory. If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity, ROE? (Hint: Remember the DuPont equation from Chapter 3.) LO 3 LO 3 von Select problems are available in McGraw-Hill NS AND PROBLEMS connect Connect FINANCE section of the preface for more information L01 1. Calculating Float. You have $120,000 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $27.000. Does this create a disbursement float or a collection float? What is your available balance? Book balance? Calculating Float You ha 14 200

Answer 1

17.16 :

The five Cs of Credit:

• Character
• Capacity
• Capital
• Conditions
• Collateral

Character: To find out how trustworthy and reliable the borrower is; generally, lenders will evaluate the borrower's credit score, credit history ― bankruptcies, foreclosures, and judgments ― and how he has handled your debt obligations.

Capacity: This considers the borrower's cash flows and measures his ability to repay the debt obligations. Lenders try to establish whether potential borrowers have enough cash to pay back what they borrow.

Capital: Lenders look at the debt level of the borrower to find out the leverage.Higher the equity, the lower the leverage, which is a positive thing

Conditions: Lenders want to understand the current market conditions would impact the borrower, and his business, and the impact of such conditions on the size of the loan, the interest rate, given the industry that the borrower operates in.

Collateral: The business and personal assets that the borrower can pledge to back the loan.

17.20:

Inventory turnover = Cost of Goods Sold / Average Inventory

Implementation of JIT decreases average inventory held by the business. In fact, companies with JIT hold very little inventories. As the denominator decreases, the numerator remaining unchanged, inventory turnover would increase.

Total Asset Turnover = Sales / Average Total Assets

As inventories decrease, total assets would also decrease, and total asset turnover would increase.

ROE = Profit Margin x Asset Turnover x Equity Multiplier = Net Income / Sales * Sales / Total Assets * Total Assets / Equity.

As investment in inventory decreases, net income would increase, leading to a higher profit margin. As already stated, asset turnover also increases. There would be slight dip in the equity multiplier as the numerator decreases. But overall, ROE is expected to increase.