Padre Inc. recently hired your consulting firm to improve the company’s performance.
11. Padre Inc. recently hired your consulting firm to improve the company’s performance. Padre has been highly
profitable but has been experiencing cash shortages due to its high growth rate. As part of your analysis, you want to determine the firm’s cash conversion cycle and the firm’s cost of trade credit.
11.a Using the following information and a 365-day year, what is the firm’s current cash conversion cycle? (10 points) What would you recommend Padre to reduce its cash conversion cycle? (2.5 points)
| Inventory = | $75,000 |
| Sales = | $600,000 |
| Cost of goods sold = | $360,000 |
| Accounts receivable = | $160,000 |
| Accounts payable = | $25,000 |
11.b Currently, suppliers offer Padre credit terms of 2/10 net 30 days. What does this mean? (5 points) Padre is not taking the discount, but is paying in 25 days instead of waiting for the specified 30 days. Since Padre is neither taking the discount nor paying on the due date, what is Padre’s nominal annual percentage cost of its non-free trade credit? (5 points) What is the effective annual percentage cost of Padre’s non-free trade credit? (5 points)
11.c What would be the effective annual percentage cost of Padre’s non-free trade credit if Padre is not taking the discount but paying on Day 30? (5 points) How would you advise Padre about its non-free trade credit if it must use this trade credit? (2.5 points)
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