QuestionQuestion

Cash conversion cycle:
Primrose Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80 percent of sales, and it finances working capital with bank loans at an 8 percent rate. What is Primrose’s cash conversion cycle (CCC)? If primrose could lower its inventories and receivables by 10 percent each and increase its payables by 10 percent, all without affecting either sales or cost of goods sold, what would the new CCC be, how much cash would be freed up, and how would that affect pre-tax profits?

AFN equation:
Carter Corporation’s sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent. Its assets totaled $3 million at the end of 2005. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2005, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 5 percent, and the forecasted retention ratio is 30 percent. Use the AFN equation to forecast Carter’s additional funds needed for the coming year.

Pro forma income statement:
At the end of last year, Roberts, Inc. reported the following income statement (in millions of dollars):
Sales $3000
Operating costs excluding depreciation 2450
EBITDA $550
Depreciation 250
Interest 125
EBT $175
Taxes (40%) 70
Net Income 105
Looking ahead to the following year, the company’s CFO has assembled the following information:
Year-end sales are expected to be 10 percent higher than the $3 billion in sales generated last year
Year-end operating costs, excluding depreciation, are expected to equal 80percent of year-end sales.
Depreciation is expected to increase at the same rate as sales.
Interest costs are expected to remain unchanged.
The tax rate is expected to remain at 40 percent.
On the basis of this information, what will be the forecast for Roberts’ year-end net income?

Regression:
Estimate the revenue, receivables, inventory, or payables of Netflix Company. The financial data at http://finance.yahoo.com/ calculate a projection for the next 12 months.

Cash Conversion Cycle and Working Capital Management:
What are accruals called spontaneous sources of funds, what are their costs, and why don’t firms use more of them?

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Cash conversion cycle:
CCC = AAI + ACP – APP
AAI = average age of inventory =Ave Inv/COGS/360 = 2m /(.8)(15m)/360
ACP = Average Collection period =Ave ARR/Sales/day = 3m/(15m)/360
APP = Average payment period = AveAP/COGS/day =1m/(.8)(15m)/360...
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