a) Currently Nemonix is using a decentralized collection system whereby customers mail their cheques to one of the firm’s eight regional locations. Its annual sales are $95 million. Cheques are deposited each business day in a local bank and the amount of the deposit is sent to the firm’s concentration bank in Dallas.
The average time between deposit in the local bank and the availability of those funds in Dallas to Nemonix, is 6 days. Nemonix has determined that the use of wire transfers would reduce the float by 4 days. If transfers will be made on the 250 days that banks are open each year, should Nemonix switch to the wire transfer system? Justify your response.
Note: Assume that Nemonix can earn 8% on the funds released through this more efficient transfer. (8 marks)
b) What is the inventory conversion period for O’Brian’s if it has sales of $320,000, an average inventory of $5,333 and a cash conversion cycle of 20 days?
Assume the cost of sales is 55% of sales. (4 marks)
c) Calculate Bodacious Bodywear’s weighted average cost of capital under the following conditions:
*The firm has 30% debt, 10% preferred stock, and 60% equity.
*The cost of common equity is 14% and the cost of preferred stock is 9%.
*The firm’s debt has a before-tax cost of debt of 10% (including flotation costs). *The firm is in the 40% tax bracket