Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN: 9781285867977
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 16, Problem 2Q
Summary Introduction
To explain: The cash conversion cycle, and its relationship with firm’s profitability.
Introduction:
Cash Conversion Cycle:
It indicates that duration in which funds keep involved from the production process to collection of cash through the sale process.
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Define the cash conversion cycle (CCC) and explain why, holding other things constant, afirm’s profitability would increase if it lowered its CCC.
Does an increase in the long-term growth rate of free cash flowsalways cause an increase in the value of operations? Explain youranswer.
How would a reduction in the cash conversion cycle increase profitability?
Chapter 16 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 16 - What are some pros and cons of holding high levels...Ch. 16 - Prob. 2QCh. 16 - What are the two definitions of cash, and why do...Ch. 16 - Prob. 4QCh. 16 - What are the four key factors in a firm's credit...Ch. 16 - Prob. 6QCh. 16 - Why is some trade credit called free while other...Ch. 16 - Define each of the following loan terms, and...Ch. 16 - Why are accruals called spontaneous sources of...Ch. 16 - Indicate using a (+), (), or (0) whether each of...
Ch. 16 - CASH CONVERSION CYCLE Primrose Corp has 15million...Ch. 16 - RECEIVABLES INVESTMENT Lamar Lumber Company has...Ch. 16 - COST OF TRADE CREDIT AND BANK LOAN Lamar Lumber...Ch. 16 - CASH CONVERSION CYCLE Zocco Corporation has an...Ch. 16 - RECEIVABLES INVESTMENT McDowell Industries sells...Ch. 16 - WORKING CAPITAL INVESTMENT Prestopino Corporation...Ch. 16 - CASH CONVERSION CYCLE Christie Corporation is...Ch. 16 - CURRENT ASSETS INVESTMENT POLICY Rentz Corporation...Ch. 16 - Prob. 9PCh. 16 - CASH BUDGETING Helen Bowers, owner of Helens...Ch. 16 - Prob. 11SPCh. 16 - MANAGING CURRENT ASSETS Dan Barnes, financial...
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Similar questions
- Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.arrow_forwardWhat is the cash conversion cycle (CCC)? Whyis it better, other things held constant, to have a shorter rather than a longer CCC? Suppose youknow a company’s annual sales, average inventories, average accounts receivable, average accountspayable, and annual cost of goods sold. How couldyou use that information to determine the company’s CCC? If you also knew its cost of capital, howcould you determine its annual cost of carryingworking capital? How could you determine howmuch the company would save if it could reducethe CCC by, say, 5 days? What are some actions itmight take to reduce the CCC?arrow_forwardWhy is it important for a firm to minimize the length of its cash conversion cycle (CCC)? How can the firm minimize it? What are the strategies that the firm should consider while trying to minimize the CCC?arrow_forward
- 1. Define and identify the components of: a. Operating cycle b. Cash conversion cycle 2. What is the impact of longer cash conversion cycles on a firm's working capital needs? 3. Explain the profitability-risk trade-off of alternative levels of working capital balances.arrow_forwardWhich of the following situation is better for the company? O a. All of these O b. Cash conversion cycle should be shorter Oc. Cash conversion cycle should longer O d. Fixed cash conversion cyclearrow_forwardCan management of a company such as Samsung use the cash conversion cycle as a useful measure of performance? Explain.arrow_forward
- . If the company reduces its DSO without seriouslyaffecting sales, what effect would this have onfree cash flow (1) in the short run and (2) in thelong run?arrow_forwardwe can still calculate the IRR on incremental cash flows. True or false? Explain with example?arrow_forwardIf the sum of the incremental cash flows is negative, what is known about the rate of return on the incremental investment?arrow_forward
- 3. If inventory turnover decreases, what will happen to the cash conversion cycle? Assume other variable are held constant. Support your answer with example. How EOQ can reduce Inventory cost?arrow_forwardWhat is the effect of changes in cash flows, investment cost and cash outflows on profitability (present value) index Profitability index will decrease with an increase in cash flows, a decrease in investment cost, or a decrease in cash outflows. Profitability index will decrease with an increase in cash outflows, an increase in investment cost, or an increase in cash inflows. Profitability index will increase with an increase in cash inflows, an increase in investment cost, or an increase in cash outflows. Profitability index will increase with an increase in cash flows, a decrease in investment costs or a decrease in cash outflows.arrow_forwardProjected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations. Is the above statement True or False? Please Explain.arrow_forward
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