C Ong.cengage.com/static/nb/atfindexchtminbld- 5932918inbNodeld-2162709478eISBN-
ID: 2791406 • Letter: C
Question
C Ong.cengage.com/static/nb/atfindexchtminbld- 5932918inbNodeld-2162709478eISBN-9781305635975 8 MINDTAP Assignment 15- Working Capital Management d Due Tomorrow at 11 PM EST 4. Current asset financing policies Aa Aa Firms manage a varlety of current assets. Permanent current assets are necessary for firms to maintain their businesses, and they will be carried even through downturns in business cycdles. Temporary current assets fluctuate seasonally or with business cycles. Firms must devise a financing strategy that best fits their business situation and that best manages their risk. Use the following table to identify the different current asset financing policies Description Financing Policy Long-term capital finances all fixed assets and the nonseasonal portion of current assets, as well as seasonal needs of current assets Long-term capital finances all permanent assets, but short-tem debt finances temporary current assets. Long-term capital finances some portion of the nonseasonal part L of current assets, as well as all fixed assets, and short-term loans finance all seasonal needs of current assets and the remaining portion of nonseasonal current assets. Suppose a firm occasionally faces demand for short-term credit but usually has an excess of short-term capital to finance current assets. Which approach is the firm following? O Maturity matching approach O Aggressive approach O Type here to searchExplanation / Answer
1st financing policy: Conservatism approach
(A policy where all of the fixed assets, all of the permanent current assets, and some of the temporary current assets of a firm are financed with long-term capital).
2nd financing policy: Maturity matching approach
(A method of financing where each assets would be offset with a financing instrument of the same approximate maturity)
3rd financing policy: Aggressive approach
use short-term financing to finance permanent assets.
Answer: Aggressive approach
The aggressive approach suggests that complete estimated needs of current assets should be financed from short-term sources even a part of fixed assets investments be financed from short-term sources. This approach makes the finance – mix more risky, less costly and more profitable.
The answer is $831.05
The nominal annual cost of the trade credit extended by the supplier is 44.54%
Suppose purple turtle does not take advantage of the discount and then chooses to pay its supplier late 25 days. so that on average,. On average, purple turtle will pay its supplier on the 50th day after the sale. As a result, purple turtle can decrease its nominal cost of trade credit by by1.34% paying late.
Solution:
True price of the invoice = (100%-discount rate) X invoice amount
= (100%-3%) X $856.75
= $831.0475 or $831.05
This means that there will be a 3% penalty if not paid within 20 days.
The cost of trade credit extended by the supplier can be computed using the formula: discount%/(1-discount %)*(360/full allowed payment days-discount days)
= 3%/1-3%*(360/45-20)
= 3.09278%*14.4
= 44.536%. or 44.54%
If purple turtle does not take the advantage of the discount then it will effectively pay 3 % of interest for 45-20 = 25 days use of credit. Thus the cost will be = 360/25*3%
= 43.2%
The decrease in nominal cost of trade credit = 44.54%-43.2% = 1.34%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.