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Fundamentals of Corporate Finance

Stephen A. Ross; Randolph W. Westerfield; Bradford D. Jordan

Chapter 20

CREDIT AND INVENTORY MANAGEMENT - all with Video Answers

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Chapter Questions

06:23

Problem 1

Describe each of the following:
a. Sight draft.
b. Time draft.
c. Banker's acceptance.
d. Promissory note.
e. Trade acceptance.

Jennifer Stoner
Jennifer Stoner
Numerade Educator

Problem 2

In what form is trade credit most commonly offered? What is the credit instrument in this case?

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Problem 3

What costs are associated with carrying receivables? What costs are associated with not granting credit? What do we call the sum of the costs for different levels of receivables?

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Problem 4

What are the five $C s$ of credit? Explain why each is important.

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Problem 5

What are some of the factors that determine the length of the credit period? Why is the length of the buyer's operating

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00:01

Problem 6

In each of the following pairings, indicate which firm would probably have a longer credit period and explain your reasoning.
a. Firm A sells a miracle cure for baldness; Firm B sells toupees.
b. Firm A specializes in products for landlords; Firm B specializes in products for renters.
c. Firm A sells to customers with an inventory turnover of 10 times; Firm B sells to customers with an inventory turnover of 20 times.
d. Firm A sells fresh fruit; Firm B sells canned fruit.
e. Firm A sells and installs carpeting; Firm B sells rugs.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 7

What are the different inventory types? How do the types differ? Why are some types said to have dependent demand whereas other types are said to have independent demand?

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01:00

Problem 8

If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity (ROE)?

Xiaomin Bian
Xiaomin Bian
Numerade Educator
00:51

Problem 9

If a company's inventory carrying costs are $\$ 5$ million per year and its fixed order costs are $\$ 8$ million per year, do you think the firm keeps too much inventory on hand or too little? Why?

Noah Musser
Noah Musser
Numerade Educator

Problem 10

At least part of Dell's corporate profits can be traced to its inventory management. Using just-in-time inventory, Dell typically maintains an inventory of three to four days' sales. Competitors such as Hewlett-Packard and IBM have attempted to match Dell's inventory policies, but lag far behind. In an industry where the price of PC components continues to decline, Dell clearly has a competitive advantage. Why would you say that it is to Dell's advantage to have such a short inventory period? If doing this is valuable, why don't all other PC manufacturers switch to Dell's approach?

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