1) Suppose that Dunn Industries has annual sales of $4.05 million, cost of goods
ID: 2565424 • Letter: 1
Question
1)
Suppose that Dunn Industries has annual sales of $4.05 million, cost of goods sold of $1,580,000, average inventories of $1,046,000, and average accounts receivable of $680,000. Assume that all of Dunn’s sales are on credit.
What will be the firm’s operating cycle? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.)
2)
Suppose your firm is seeking a five year, amortizing $300,000 loan with annual payments and your bank is offering you the choice between a $310,000 loan with a $10,000 compensating balance and a $300,000 loan without a compensating balance. The interest rate on the $300,000 loan is 10.0 percent.
How low would the interest rate on the loan with the compensating balance have to be for you to choose it? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Suppose that Dunn Industries has annual sales of $4.05 million, cost of goods sold of $1,580,000, average inventories of $1,046,000, and average accounts receivable of $680,000. Assume that all of Dunn’s sales are on credit.
Explanation / Answer
Answer to Question 1.
Operating Cycle = Days’ Sales of Inventory + Days’ Sales Outstanding
Days’ Sales of Inventory = 365 * Average Inventories / COGS
Days’ Sales of Inventory = 365 * 1,046,000 / 1,580,000
Days’ Sales of Inventory = 241.64 days
Days’ Sales Outstanding = 365 * Average Accounts Receivable / Credit Sales
Days’ Sales Outstanding = 365 * 680,000 / 4,050,000
Days’ Sales Outstanding = 61.28 days
Operating Cycle = 241.64 + 61.28
Operating Cycle = 302.92 days
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