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Working Capital Management

1. Working Capital Management. Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (i) cash and (ii) net working capital:

a. Paying out a $2 million cash dividend.

b. A customer paying a $2,500 bill resulting from a previous sale.

c. Paying $5,000 previously owed to one of its suppliers.

d. Borrowing $1 million long-term and investing the proceeds in inventory.

e. Borrowing $1 million short-term and investing the proceeds in inventory.

f. Selling $5 million of marketable securities for cash.

2. Short-Term Financial Plans. Fill in the blanks in the following statements:

a. A firm has a cash surplus when its ________ exceeds its ________. The surplus is normally invested in ________.

b. In developing the short-term financial plan, the financial manager starts with a(n) ________ budget for the next year. This budget shows the ________ generated or absorbed by the firm`s operations and also the minimum ________ needed to support these operations. The financialР  manager may also wish to invest in ________ as a reserve for unexpected cash requirements.

3. Sources and Uses of Cash. State how each of the following events would affect the firm`s balance sheet. State whether each change is aР  source or use of cash.

a. An automobile manufacturer increases production in response to a forecast increase in demand. Unfortunately, the demand does not increase.

b. Competition forces the firm to give customers more time to pay for their purchases.

c. The firm sells a parcel of land for $100,000. The land was purchased 5 years earlier for $200,000.

d. The firm repurchases its own common stock.

e. The firm pays its quarterly dividend.

f. The firm issues $1 million of long-term debt and uses the proceeds to repay a short-term bank loan.

4. Cash Conversion Cycle. What effect will the following events have on the cash conversion cycle?

a. Higher financing rates induce the firm to reduce its level of inventory.

b. The firm obtains a new line of credit that enables it to avoid stretching payables to its suppliers.

c. The firm factors its accounts receivable.

d. A recession occurs, and the firm`s customers increasingly stretch their payables.

5. Managing Working Capital. A new computer system allows your firm to more accurately monitor inventory and anticipate future inventory  shortfalls. As a result, the firm feels more able to pare down its inventory levels. What effect will the new system have on working capital

and on the cash conversion cycle?

6. Cash Conversion Cycle. Calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle for the following firm: Income statement data:

Sales 5,000

Cost of goods sold 4,200

Balance sheet data:

Beginning of Year End of Year

Inventory 500 600

Accounts receivable 100 120

Accounts payable 250 290

7. Cash Conversion Cycle. What effect will the following have on the cash conversion cycle?

a. Customers are given a larger discount for cash transactions.

b. The inventory turnover ratio falls from 8 to 6.

c. New technology streamlines the production process.

d. The firm adopts a policy of reducing outstanding accounts payable.

e. The firm starts producing more goods in response to customers` advance orders instead of producing for inventory.

f. A temporary glut in the commodity market induces the firm to stock up on raw material s while prices are low.