# Treasury Management

Provide detailed step by step solution explaining in words on how you get to the answers. The answers are provided to you and highlighted, however you have to explain step by step on how you get to the answers:

4.1. The following information about the operations of Franklin Company is available. The cost of capital for Franklin is 13%.

Annual sales

\$25 million

Variable cost ratio

68%

Number of days sales outstanding

73 days

Number of days in payables

30 days

Inventory turnover ratio

4.21

A. Inventory period

B. Receivables period

C. Operating cycle

D. Payables period

E. Cash cycle

F. Sales in one operating cycle

G. NPV of its operating cycle

A. 86.70 days, B. 73 days, C. 159.7 days, D. 30 days, E. 129.7 days, F. \$10.938 million, G. \$3.005 million ?

4.2. The following information about the operations of Hancock Company is available.

Annual sales

\$185 million

Cost of goods sold

\$125 million

Average accounts receivable

\$25 million

Average accounts payable

\$15 million

Average inventory

\$30 million

Cost of capital

12%

(A) Find the NPV of its operating cycle.

(B) What is the new NPV if Hancock can delay the payments by 2 days and make the collections 2 days earlier? By comparing the answers to (A) and (B), can you tell if the company made the right move?

(A) \$20.253 million, (B) \$20.026 million ?

4.3. We have the following information about the operations of Eden Company:

Annual sales

\$78 million

Variable cost ratio

65%

Number of days sales outstanding

95 days

Number of days in payables

35 days

Inventory turnover ratio

3.21

Cost of capital

11%

(A) Find the NPV of its operating cycle.

(B) What is the NPV if the payments can be delayed by 3 days, and collections accelerated by 3 days?

(C) Calculate the increase in value of the firm due to this change in operations.

(A) \$13.315 million, (B) \$13.159 million, (C) V(A) = \$234.982 million, V(B) = \$235.623 million, increase \$0.641 million ?

4.4. The income statement of Gladstone Company for 2009 shows the total sales to be \$135 million, while the cost of goods sold is 63% of sales. The cost of capital for Gladstone is 15%. All sales are on credit. We also have the following information about the company from its balance sheet, in \$million.

12/31/09

12/31/08

Inventory

35

30

Accounts receivable

80

40

Accounts payable

30

20

A. Find the length of operating cycle for Gladstone Company.

B. Find the number of days in its cash cycle.

C. Find the NPV of its operating cycle.

(A) 301.7 days, (B) 194.41 days, (C) \$31.943 million ?

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