Chapter 30 Working Capital Management 807
bre44380_ch30_787-812.indd 807 10/06/15 10:57 AM
Select problems are available in McGraw-Hill’s Connect.
Please see the preface for more information.BASIC
- Inventories What are the trade-offs involved in the decision of how much inventory the
firm should carry? - Credit policy Company X sells on a 1/30, net 60 basis. Customer Y buys goods invoiced at
$1,000.
a. How much can Y deduct from the bill if Y pays on day 30?
b. What is the effective annual rate of interest if Y pays on the due date rather than on
day 30?
c. How would you expect payment terms to change under the following conditions?
i. The goods are perishable.ii. The goods are not rapidly resold.
iii. The goods are sold to high-risk firms.
- Credit policy The lag between the purchase date and the date on which payment is due is
known as the terms lag. The lag between the due date and the date on which the buyer actu-
ally pays is the due lag, and the lag between the purchase and actual payment dates is the pay
lag. Thus,
Pay lag = terms lag + due lag
State how you would expect the following events to affect each type of lag:
a. The company imposes a service charge on late payers.
b. A recession causes customers to be short of cash.
c. The company changes its terms from net 10 to net 20.
- Credit policy The Branding Iron Company sells its irons for $50 apiece wholesale. Produc-
tion cost is $40 per iron. There is a 25% chance that wholesaler Q will go bankrupt within the
next year. Q orders 1,000 irons and asks for six months’ credit. Should you accept the order?
Assume that the discount rate is 10% per year, there is no chance of a repeat order, and Q will
pay either in full or not at all. - Credit policy Look back at Section 30-2. Cast Iron’s costs have increased from $1,000 to
$1,050. Assuming there is no possibility of repeat orders, answer the following:
a. When should Cast Iron grant or refuse credit?
b. If it costs $12 to determine whether a customer has been a prompt or slow payer in the
past, when should Cast Iron undertake such a check?
- Credit policy Look back at the discussion in Section 30-2 of credit decisions with repeat
orders. If p 1 = .8, what is the minimum level of p 2 at which Cast Iron is justified in extending
credit? - Credit management True or false?
a. Exporters who require greater certainty of payment arrange for the customers to sign a bill
of lading in exchange for a sight draft.
b. It makes sense to monitor the credit manager’s performance by looking at the proportion
of bad debts.
c. If a customer refuses to pay despite repeated reminders, the company usually turns the
debt over to a factor or an attorney.
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SETS