Part One: Working Capital Analysis

Capers, Inc. has just promoted you to Chief financial officer. Since this is a new office in the company, you are understaffed and many of the responsibilities have been assigned to you.

The first task you have been assigned concerns the cash conversion cycle. Your boss has asked that you examine the following data:

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1. Inventory conversion period is 60 Days

2. Payables deferral period is 30 days

3. Receivables collection period of 40 days

The second task concerns the cost of bank loans under differing conditions.

Specifically:

1. The company needs $1,500,000 for a new project.

2. The loan will cost 10% simple interest, for 4 months, with a 20% compensating balance.

Required:

1. What is the firm’s cash conversion cycle?

2. How many times per year is the firm’s inventory turnover, if sales are $4,000,000 per year?

3. If sales are all credit sales and amount to $4,000,000 per year, what is the firm’s average investment in receivables?

4. What is the nominal interest rate on the loan?

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