Tutorial WCM
TUTORIAL
WORKING CAPITAL MANGAMENT
CHAPTER 14 & 15
1. Explain what is meant by the statement “The use long term debt as opposed to current liabilities subjects to the firm to a lower risk of illiquidity.”
2. Why does an increase in the ratio of current to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of current liabilities to total assets affect profitability and risk?
3. What is the difference between the firm’s operating cycle and its cash conversion cycle?
4. What are the benefits, costs, and risks of an aggressive funding strategy and a conservative funding strategy? Under which strategy is the borrowing often in excess of the actual need?
5. Why is it important for a firm to minimize the length of its cash conversion cycle?
6. Malaysian Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected into 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about RM30million. Assume there is no difference in the investment per ringgit of sales in inventory, receivable, and payables; and a 365-day year.
a. Calculate the firm’s operating cycle.
b. Calculate the firm’s cash conversion cycle.
c. Calculate the amount or resources needed to support the firm’s cash conversion cycle.
d. Discuss how management might be able to reduce the cash conversion cycle.
7. Camp Manufacturing turns over its inventory 8 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm’s annual sales are RM3.5 million. Assume there is no difference in investment per ringgit of sales in inventory, receivable, and payables; and a 365-day year.
a. Calculate the firm’s OC and CCC.
b. Calculate the firm’s daily cash operating expenditure. How much in resources must be invested to support its CCC?
c. If the firm pays 14% for these
WORKING CAPITAL MANGAMENT
CHAPTER 14 & 15
1. Explain what is meant by the statement “The use long term debt as opposed to current liabilities subjects to the firm to a lower risk of illiquidity.”
2. Why does an increase in the ratio of current to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of current liabilities to total assets affect profitability and risk?
3. What is the difference between the firm’s operating cycle and its cash conversion cycle?
4. What are the benefits, costs, and risks of an aggressive funding strategy and a conservative funding strategy? Under which strategy is the borrowing often in excess of the actual need?
5. Why is it important for a firm to minimize the length of its cash conversion cycle?
6. Malaysian Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected into 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about RM30million. Assume there is no difference in the investment per ringgit of sales in inventory, receivable, and payables; and a 365-day year.
a. Calculate the firm’s operating cycle.
b. Calculate the firm’s cash conversion cycle.
c. Calculate the amount or resources needed to support the firm’s cash conversion cycle.
d. Discuss how management might be able to reduce the cash conversion cycle.
7. Camp Manufacturing turns over its inventory 8 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm’s annual sales are RM3.5 million. Assume there is no difference in investment per ringgit of sales in inventory, receivable, and payables; and a 365-day year.
a. Calculate the firm’s OC and CCC.
b. Calculate the firm’s daily cash operating expenditure. How much in resources must be invested to support its CCC?
c. If the firm pays 14% for these