Title: Operating and Cash cycles, Corporate Ethics, and Payables Period

Contents

Page 604

Use the following information to answer questions 6-10: Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The increased payables period will be in effect for all of the company’s 4000 suppliers.

6. Operating and Cash cycles. What impact did this change in payables policy have on BlueSky’s operating cycle? ; Its cash cycle?

7. Operating and cash cycles. What impact did the announcement have on BlueSky’s suppliers?

8. Corporate Ethics. Is it ethical for large firms to unilaterally lengthen their payables periods particularly when dealing with smaller suppliers?

9. Payables Period. Why don’t all firms simply increase their payables to shorten their cash cycles?

10. Payables period. BlueSky lengthened its payable period to “control costs and optimize cash flow.” Exactly what is the cash benefit to BlueSky from this change?

Page 604: Problem 1

Changes in the Cash Account: Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs.

a. A dividend is paid with funds received from a sale of debt

b. Real estate is purchased and paid for with short-term debt

c. Inventory is bought on credit

d. A short-term bank loan is repaid

e. Next year’s taxes are prepaid

f. Preferred stock is redeemed

g. Sales are made on credit

h. Interest on long-term debt is paid

i. Payments for previous sales are collected

j. The accounts payable balance is reduced

k. A dividend is paid

l. Production supplies are purchased and paid for with a short-term note N.

m. Utility bills are paid

n. Cash is paid for raw materials purchased for inventory

o. Marketable securities are sold  

Page 605: Problems 6 and 7

Problem 6: Calculating Cycles. Consider the following financial statement information for the Mediate Corporation.

Calculate the operating and cash cycles. How do you interpret your answer?

Problem 7

Factoring receivables. Your firm has an average collection period of 32 days. Current practice is to factor all receivables immediately at 1.5 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely?

The above questions are from the below text:

Ross, S., Westerfield, R., & Jordan, B. (2012). Fundamentals of corporate finance. Boston, MA: McGraw-Hill/Irwin.

Number of words inclusive of the above questions: 1,080 (3.6 pages)