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Ch_21_Show - CHAPTER 21 Working Capital Management 1 Topics...

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  1 CHAPTER 21 Working Capital Management
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  2 Topics in Chapter Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and commercial paper
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  3 Basic Definitions Gross working capital:   Total current assets. Net working capital: Current assets - Current liabilities. Net operating working capital (NOWC): Operating CA – Operating CL = (Cash + Inv. + A/R) – (Accruals + A/P) (More…)
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  4 Definitions  (Continued) Working capital management:  Includes both establishing working  capital policy and then the day-to-day  control of cash, inventories, receivables,  accruals, and accounts payable. Working capital policy: The level of each current asset. How current assets are financed.
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  5 Selected Ratios for SKI SKI Industry Current 1.75x 2.25x Quick 0.83x 1.20x Debt/Assets 58.76% 50.00% Turnover of Cash 16.67x 22.22x DSO(365-day year) 45.63 32.00 Inv. Turnover 4.82x 7.00x F.A. Turnover 11.35x 12.00x T.A. Turnover 2.08x 3.00x Profit Margin 2.07% 3.50% ROE 10.45% 21.00% Payables deferral 30.00 33.00
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  6 How does SKI’s working capital  policy compare with the industry? Working capital policy is reflected in a  firm’s current ratio, quick ratio, turnover  of cash and securities, inventory  turnover, and DSO. These ratios indicate SKI has large  amounts of working capital relative to its  level of sales.  Thus, SKI is following a  relaxed policy.
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  7 Is SKI inefficient or just  conservative? A relaxed policy may be appropriate if it  reduces risk more than profitability. However, SKI is much less profitable  than the average firm in the industry.   This suggests that the company  probably has excessive working capital.
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  8 Cash Conversion Cycle The cash conversion cycle focuses on the time  between payments made for materials and  labor and payments received from sales: Cash  Conversion   = Cycle Inventory Conversion   +   Period  Receivables Collection  - Period Payables Deferral  . Period
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9 Cash Conversion Cycle  (Cont.) CCC = + CCC = + 45.6 – 30 CCC = 75.7 + 45.6 – 30 CCC = 91.3 days. Days per year
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This note was uploaded on 04/30/2008 for the course FNCE 203 taught by Professor Sfr during the Spring '08 term at UConn.

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Ch_21_Show - CHAPTER 21 Working Capital Management 1 Topics...

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