Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
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 Parramore Corp has 12...Ch. 16 - RECEIVABLES INVESTMENT Leyton Lumber Company has...Ch. 16 - COST OF TRADE CREDIT AND BANK LOAN Lancaster...Ch. 16 - Prob. 4PCh. 16 - RECEIVABLES INVESTMENT McEwan Industries sells on...Ch. 16 - WORKING CAPITAL INVESTMENT Pasha Corporation...Ch. 16 - Prob. 7PCh. 16 - CURRENT ASSETS INVESTMENT POLICY Rentz Corporation...Ch. 16 - Prob. 9P
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- Define the following terms: inventory conversion period, average collection period, and payables deferral period. Explain how these terms are used to form the cash conversion cycle. How would a reduction in the cash conversion cycle increase profitability? What are some actions a firm can take to shorten its cash conversion cycle? V.arrow_forwardDefine 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_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_forwardThe internal rate of return (IRR) is The same thing as the cost of capital. The discount rate that equates the present values of cash inflows and cash outflows. The same thing as the net present value. The same thing as the profitability index.arrow_forward
- Can 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_forward
- If the sum of the incremental cash flows is negative, what is known about the rate of return on the incremental investment?arrow_forward3. 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_forwardIs the cash conversion cycle useful and important in financial analysis? Explainarrow_forward
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