chap019 - Solutions to Chapter 19 Working Capital...

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Solutions to Chapter 19 Working Capital Management and Short-Term Planning 1. Cash Net Working Capital a. $2 million decrease $2 million decrease b. $2,500 increase Unchanged c. $5,000 decrease Unchanged d. Unchanged $1 million increase e. Unchanged Unchanged f. $5 million increase Unchanged 2. a. long-term financing, total capital requirement, marketable securities b. cash, cash, cash balance, marketable securities 3. a. Inventories of raw materials, work in process, and finished goods increase and cash decreases (use of cash). b. Accounts receivable increase (use of cash). c. Decrease in fixed assets (land), increase in cash (source of cash), and decrease in shareholders’ equity when the loss on the land is recognized. d. Shareholders’ equity decreases and cash decreases (use of cash). e. Retained earnings and cash decrease when the dividend is paid (use of cash). f. Long-term debt increases (source of cash), short-term debt decreases (use of cash). 4. Remember that: 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. b. The accounts payable period will fall, which will lengthen the cash conversion cycle. 19-1
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c.The accounts receivable period will fall, which will shorten 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. 19-2
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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. 6. Accounts receivable period days 0 . 8 365 / 000 , 5 2 / ) 120 100 ( = + = Inventory period days 8 . 47 365 / 200 , 4 2 / ) 600 500 ( = + = Accounts payable period days 5 . 23 365 / 200 , 4 2 / ) 290 250 ( = + = Cash conversion cycle = 8.0 + 47.8 – 23.5 = 32.3 days 7. cash conversion cycle = inventory period + receivables period – 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. b. Lower inventory turnover implies more days in inventory. The cash conversion cycle increases. c. If the firm produces goods more quickly, inventory levels corresponding to work in process will fall. Therefore, the inventory period and the cash conversion cycle fall. d.
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chap019 - Solutions to Chapter 19 Working Capital...

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