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2. The Garcia Industries balance sheet and income statement for the year ended 2006 are as follows:
Balance Sheet (in Millions of Dollars)
Assets Liabilities and Stockholders’ Equity .
Cash $6.0 Accounts payable $10.0
Accounts receivable 14.0 Salaries, benefits, & payroll taxes payable 2.0
Inventories* 12.0 Other current liabilities 10.0
Fixed assets, net 40.0 Long-term debt 12.0
$72.0 Stockholders’ equity 38.0
$72.0
*The average inventory over the pas 2years also equals $12.0 million .
Income Statement (in Millions of Dollars)
Net Sales $100.0
Cost of Sales 60.0
Selling, general, and administrative expenses 20.0
Other expenses 15.0
Net income $ 5.0
a. Determine the length of the inventory conversion period.
b. Determine the length of the receivables conversion period.
c. Determine the length of the operating cycle.
d. Determine the length of the payables deferral period.
e. Determine the length of the cash conversion cycle.
f. What is the meaning of the number you calculated in (e)?
7. The Hopewell Pharmaceutical Company’s balance sheet and income statement for last
year are as follows:

Balance Sheet ( in Millions of Dollars)
Assets Liabilities and Equity
Cash and marketable securities $1,100 Accounts payable $ 900
Accounts receivable 1,300 Accrued liabilities
Inventories* 800 (salaries and benefits) 300
Other current assets 200 Other current liabilities 700
Total current assets $3,400 Total current liabilities $1,900
Plant and equipment (net) 2,300 Long-term debt and other
Other assets 1,000 liabilities 1,000
Total assets $6,700 Common stock 1,800
Retained earnings 2,000
Total stockholders’ equity $3,800
Total liabilities & equity $6,700
*Assume that average inventory over the year was $800 million, that is, the same as ending inventory
Income Statement (in Millions of Dollars)
Net Sales $6,500
Cost of Sales 1,500
Selling, general, and administrative expenses 2,500
Other expenses 800
Total expenses $4,800
Earnings before taxes 1,700
Taxes 680
Earnings after taxes (net income) $1,020
a. Determine Hopewell’s cash conversion cycle.
b. Give an interpretation of the value computed in (a).
4. Calculate the effective annual percentage rate of forgoing the cash discount under each of the following credit terms:
7. Pyramid Products Company has a revolving credit agreement with its bank. The company can borrow up to $1 million under the agreement at an annual interest rate of 9 percent. Pyramid is required to maintain a 10 percent compensating balance on any funds borrowed under the agreement and to pay a 0.5 percent commitment fee on the unused portion of the credit line. Assume that Pyramid has no funds in the account at the bank that can be used to meet the compensating balance requirement. Determine the annual financing cost of borrowing each of the following amounts under the credit agreement:
a. $250,000
b. $500,000
c. $1,000,000
8. Walters Manufacturing Company has been approached by a commercial paper dealer offering to sell an issue of commercial paper for the firm. The dealer indicates that Walters could sell a $5 million issue maturing in 182 days at an interest rate of 6 percent per annum (deducted in advance). The fee to the dealer for selling the issue would be $8,000. Determine Walters’s annual financing cost of this commercial paper financing.