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BUSINESS FINANCE

TOPIC:

Working Capital Management

Problems:
A
The following checks were received by Azenith Company during January
...

Face Amount

Days delay

100,000
...
00

5

50,000
...
00

6

B
...
The controlled disbursement bank
will charge P120 per month for account maintenance and P20 per check processed
...
The company issues 100 checks of
average face amount of P30,000 per day
...
She estimates that she could earn an
additional 25 basis points on the investments if she could invest earlier in the day
...
Determine the annual net
benefit, or cost, of using the controlled disbursement account instead of the current system
...

Nero Company maintains a centralized billing system at its home office to handle average daily
collections of P450,000
...

a
...

If management has designed a system of lock-boxes with regional that would have reduced the
float by 1 ½ days and home office credit department expense by P 52,000 annually, what is the largest
total amount of required compensating balance that the firm should he willing to accept with the lock-box
arrangement?
D
...
They sell to retail shops and
stores in multistate area in the western part of the Philippines
...
Santos, the treasurer, is considering
the use of a lockbox for the collection of their customer’s remittance
...
During a typical month they receive an average of 5,000

1

checks with an average face amount of P 300 from a customer and 2,000 checks with an average face
amount of P2,500 from the regional-chain customers
...
Bank X has offered a lockbox service that
would reduce the total to 3 days
...
JO currently pays P
...
Santos does not believe
there will be any additional savings to be achieved if the company eliminates the internal processing of
the customers’ remittances
...

a
...

b
...

The Greenmax Company makes payments by checks
...
Greenmax
pays Bluemax with a check mailed 30 days after the invoice date
...
The average payment to Bluemax is P 500
...
These costs would be eliminated by the proposed procedure
...

a
...


Should Greenmax accept Bluemax offer?
Greenmax has received a similar offer from Redmax Company
...
All other information is unchanged from the Bluemax
...

Helix Company pays account pays accounts payable on the tenth day after purchase
...
The firm currently
spends about P 15 million on operating cycle investments
...
If the firm pays 12% for its financing, what annual savings can it
realize by this plan? Assume no discount for early payment of trade credit and a 360-day year
...

Hyperion Corp
...
The system is expected to reduce mailing time by 1 ½
days, reduce processing time by 1 ½ days, and reduce check clearing time by 1 day
...

H
...
maintain an account with Bank of Malaya for collection in the
southeastern marketing area
...

The company is considering an alternative of opening two separate accounts in the southeastern area
...
Would you
recommend two bank system to Malayan Industries, Inc
...

Union Enterprises currently has a centralized billing system
...
An additional 2-days are required for
processing payments before a deposit can be made
...

The company has recently investigated the possibility of initiating a lockbox system
...
Further, processing time would be
reduced by one day, because each lockbox bank would pick up mailed deposits twice a day
...

Determine the reduction in cash balance that can be achieved through the use of a lockbox
system
...

Determine the opportunity cost of the present system, assuming a 7
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c
...

Exant Technologies,Inc
...
The firm
believes that it will have an opportunity interest rate of 12
...
Cash outlays are expected to be steady over the year
...

Determine the optimal borrowing or withdrawal lot size for the Exant Technologies, Inc
...

What is the total cost for the use of cash needed for transactions demanded?
c
...

What will be the average cash balance for the firm?

Refer to the same problem (10) assume that the Exant Technologies,Inc
...

a
...

How much would be invested in securities after 113 days?
K
...
Grander Company
plans to issue checks in the amount of P 1,000,000 each day and to deduct them from its own records at
the close of business on the day they are written
...
M
...
The firm’s agreement with the bank required it to maintain a P 500,000 average
compensating balance; this is P 250,000 greater than the cash balance the firm would otherwise have on
deposit
...

a
...

c
...

How many days of float does Grander have?
What ending daily balance should the firm try to maintain (1) on the bank’s records and (2)
on its own records?

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Suggested Solutions
A
...

Amount X
Face
Amount

Days delay

delay

100,000
...
00

150,000
...
00

50,000
...
00

75,000
...
00
1,750,000
...
Since January has 31 days, the average float is P 56,451
...
Multiplying this by the
opportunity cost for the month gives P 56,451X
...
34
...
12/365 and obtained P 575
...

B
...

Float benefits are :
Annual disbursement X Float gain X investment rate
( P 30,000 per day X 100 X 250 days) X (
...
06/365) = P61,644
Additional investment benefits are :
Amount of the investment portfolio X incremental rate
( P500,000) X (
...
250
C
...

Total foat = P 450,000 (4 days) = P 1,800,000
Cost =
...

b
...
15 ( 1
...

Maximum acceptable compensating balance
= P 153,/0
...
60

D
...

the savings achieved on each item sent to the lockbox will be the 4 days saved times the
opportunity cost rate times the size of the remittance
...
For single-outlet greeting saves P 300 X 4 X 1/365 =
P 0
...
For regional-chain customers JO saves P 2,500 X 4 X 1/365 = P 2
...
The
additional cost per item processed is P
...
45
...
The smaller checks should be processed at the company
...

The decision depends on whether the total savings from sending the larges checks to the lockbox
out-weights the full cost of using the lockbox
...
45
...
45 = P 1,400
...
45 per
month
...


Greenmax Company

a
...
They also incur
internal costs of P10
...

Under the proposed payment terms Greemax will lose value of P 500 on day 10
...
This is P 510/( 1+
...
53
...
Since they will be
better off by P 653 with the payment terms
...

b
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1X
25/365) = P 4,975
...
If Greemax accepts Redmax’s payment terms it will lose value of P 5,000 on day
10
...
08
...

F
...
00
Reduction in financing = P 41,666 X 20 days = P 833,320
...
12 X P 833,320
...
40

G
...
09 X P P 1,200,000 = P 108,000

Because the annual earnings from the float reduction of P 108,000 exceed the annual cost of P 90,000, the
proposed lockbox should be implemented
...

H
...


a
...

The company should change to the two-bank, since it yields P 1,500,000-P500,000=P1,000,000 in release
funds
...

There is no fee that would make it worthwhile for Malayan Industries,Inc
...

I
Union Enterprises
a
...

Opportunity cost of the present system is
...

Since the opportunity cost of the present system ( P 180,000) exceeds the cost of the lock box
system ( P 120,000) The system should be initiated
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Exant Technologies,Inc
...

C=

The optimal borrowing or withdrawal lot size for the Exant Technologies,Inc
...
125
______________
\ | 6000,000,000

C = P 77,460
b
...
125)(77,460)
77,460
=4,841 + 5,841 = P 9,682
c
...
27
Or 365
32
...
31 days
d
...

Initial investment in securities will be:
P 2,500,000 – P 77,460 = P 2,422,540
b
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Grander Company
a
...
00)

day 2: write check for P 1,000,000

(1,500,000
...
00

day 3
...
00) 500,000
...
00

day 4: write check for P 1000,000;'deposit
P1,000,000

(2,500,000
...
00

b
...

c
...
Grander should try to maintain a balance on the bank’s records of P 500,000
...


9



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