Mini Case: 22 - 20 k. If the company reduces its inventory without adversely affecting sales, what effect should this have on the company’s cash position (1) in the short run and (2) in the long run? Explain in terms of the cash budget and the balance sheet. Answer: Reducing inventory purchases will increase the company’s cash holdings in the short run, thus reducing the amount of financing or the target cash balance needed. In the long run, the company is likely to reduce its cash holdings in order to increase its EVA. SKI can use the “excess cash” to make investments in more productive assets such as plant and equipment. Alternatively, the firm can distribute the “excess cash” to its shareholders through higher dividends or repurchasing its shares. l. Barnes knows that SKI sells on the same credit terms as other firms in its industry. Use the ratios presented earlier to explain whether SKI’s customers pay more or less promptly than those of its competitors. If there are differences,
This is the end of the preview. Sign up
access the rest of the document.
This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.