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e. Retained earnings and cash decrease when the dividend is paid (use of cash).
4. Remember that the cash conversion cycle = inventory period + receivables period –
accounts payable period. Notice from these answers that not all actions that shorten
the cash conversion cycle are necessarily good for the firm, nor are all actions that
lengthen the cash conversion cycle necessarily bad. The costs or benefits of the
actions associated with changes in the cycle must also be considered.
a. Lower inventory levels will reduce the inventory period and therefore the cash
conversion cycle.
d. The accounts receivable period will rise (since customers pay their bills more
slowly), which will lengthen the cash conversion cycle.
5. The firm can use its new system to maintain lower inventory levels. This will
reduce the inventory period and therefore the cash conversion cycle, and will reduce
net working capital as well.
7. The cash conversion cycle equals inventory period plus receivables period minus
accounts payable period.
a. The discount should induce some customers to pay cash. Accounts receivable,
the receivables period, and the cash conversion cycle will fall.
d. If the accounts payable period falls, the cash conversion cycle will increase.
e. Because the goods are already ordered, inventory of finished product will fall
relative to sales. Therefore the inventory period and the cash conversion cycle
fall.
13. Month 3:
18,000 + (.5 90,000) + (.3 120,000) + (.2 100,000) = $119,000
15. The order is .75 times the following quarter’s sales forecast
Quarter Order
1 .75 360 = 270
2 .75 336 = 252
3 .75 384 = 288
4 .75 384 = 288
16. Since the first quarter’s sales forecast was $372, orders placed during the fourth
quarter of the preceding year would have been .75 $372 = $279.
Quarter Payment*
1 1/3 279 + 2/3 270 = 273
2 1/3 270 + 2/3 252 = 258
3 1/3 252 + 2/3 288 = 276
4 1/3 288 + 2/3 288 = 288
18. Quarter
First Second Third Fourth
Sources of cash
Uses of cash
Payments of accounts payable 273 258 276 288
Labour & administrative expenses 65 65 65 65
Interest on long-term debt 40 40 40 40
Total uses of cash 378 363 381 393
19. Quarter
First Second Third Fourth
Cash at start of period $40 $10 $15 -$14
+ Net cash inflow –30 + 5 -29 - 41
(from problem 18)
= Cash at end of period 10 15 - 14 - 55
26.
Fiscal year ending 2005 ($ million) Sears Holding Corp. Wal-Mart.
14,601 215,493
Inventory turnover (3,281 3,238)/2 (29,447 26,612)/2
=4.48 =7.69
Days to sell inventory (365/4.48)= 81.5 ( 365/7.69) = 47.5
19,701 286,103
Receivable turnover (646 301)/2 (1,715 1,254) / 2
=41.607 = 192.73
Avg. collection period in days (365/41.607)= 8.77 (365/192.73) = 1.89
14,601 215,493
A/C payables turnover = COGS/Avg. (1,092 820) / 2 ( 21,671 19,332) / 2
payable
= 15.27 = 10.52
Accounts payable period in days (365/15.3) = 23.9 (365/ 10.52)= 34.73
Cash Conversion Cycle 66.4 14.66
Let us look at the extent to which Walmart’s working capital will decline if its cash
conversion cycle decreases by 1 day. Assuming we hold average collection period
and accounts payable period constant by decreasing cash conversion cycle by 1 day
365
46.5
215,493 215,493
→ x 26,612 2 46.5
x 26,612 365
2
Wal-Mart sales, net income and total assets per employee ratios have generally
been increasing over the past five fiscal year. Sears Holding Corp. on the other
hand, has been experiencing fluctuating ratios including a negative net income per
employee ratio from 2000 to 2003 fiscal year. Wal-Mart per employee ratios in all
three categories (sales, net income and total assets) are higher than corresponding
Sears ratios. Hence, Wal-Mart appears to have has greater efficiencies in terms of
higher employee utilization.
Based on the efficiency and profitability ratios, it seems that the market responded
more positively to Wal-Mart in comparison to Sears holding Corp. For example,
Wal-Mart has enjoyed relatively stable price –earnings ratios. Wal-Mart’s stock
prices have remained relatively stable when compared with Sears.
Uses of cash
Payments of accounts payable $ 30 $ 40 $ 30
Cash purchases 70 80 60
Labour and administrative expenses 30 30 30
Capital expenditures 100 0 0
Taxes, interest, and dividends 10 10 10
Total uses of cash $240 $160 $130