Reference no: EM132340543
Sources and Uses of Short-Term Capital
1. You are a graduate student who is being considered for an internship on the finance team of a national sporting goods retailer. In your first interview, you are asked by a recent hire to explain the differences between gross working capital, net working capital, and net operating working capital and their relationship to the cash conversion cycle. How would you explain these? (3–4 paragraphs)
Sub-Competency 1:Describe basic working capital concepts (gross working capital, net working capital, net operating working capital, cash conversion cycle).
Learning Objective 1.1: Describe the differences between gross working capital, net working capital, and net operating working capital.
Learning Objective 1.2: Describe the relationship between gross working capital, net working capital, net operating working capital, and the cash conversion cycle.
2. You are the CFO for XYZ Candies, a boutique candy distributor. Your new CEO wants to expand into online sales, but this will require purchasing an additional $50,000 in inventory from the manufacturer each month over the next year. Write a memo that explains the various short-term financing options available to your CEO. What are the advantages and disadvantages of each source? What do you recommend and why? (2–3 paragraphs)
Sub-Competency 2:Analyze uses of short-term financing sources: bank loans (promissory notes, lines of credit, revolving credit agreements) and commercial paper for needed short-term working capital.
Learning Objective 2.1: Describe the short-term financing options available to finance a company’s expansion plans.
Learning Objective 2.2: Analyze the advantages and disadvantages of short-term financing sources.
3. Cash Conversion Cycle: Do problem 16-4, Parts a–c, on page 568. (Fundamentals of Financial Management, 13th Edition)
Sub-Competency 3:Calculate the inventory conversion period, the receivables collection period, and the payables deferral period to determine the cash conversion cycle.
Learning Objective 3.1: Calculate the cash conversion cycle for a company.
Learning Objective 3.2: Determine a company’s investment in accounts receivable.
Learning Objective 3.3:
Determine a company’s annual inventory turnover ratio.
4. You are the new finance manager for XYZ Parts, an electronics distributor. Before working at XYZ, you spent several years working for its close competitor, ABC Electronics. One of your first deliverables to your new CEO is an analysis of the competition from a financial perspective. As part of your analysis, you decide to compare the cash conversion cycles of the two companies, using the following facts:
XYZ Parts
Inventory conversion period = 88 days
Average collection period (ACP) = 54 days
Payables deferral period = 30 days
ABC Electronics
Inventory conversion period = 90 days
ACP = 44 days
Payables deferral period = 30 days
Based on this information, how does the cash conversion cycle for XYZ Parts compare with that of ABC Electronics? (2–3 sentences)
Sub-Competency 4: Compare a company’s cash conversion cycle with those of peer companies.
Learning Objective 4.1: Calculate the cash conversion cycles for two companies.
Learning Objective 4.2:Analyze the cash conversion cycles of two companies.
5. Additional Funds Needed:
a) Do problem 17-1 on page 591.(Fundamentals of Financial Management, 13th Edition)
b) Refer to problem 17-1. The company's executive team is very concerned about funding growth with new debt, given the existing liabilities. What strategies might the company consider to reduce its AFN?(1–2 paragraphs)
Sub-Competency 5: Calculate additional funds needed (AFN) to meet projected growth requirements.
Learning Objective 5.1:Calculate AFN.
Learning Objective 5.2:Analyze strategies for reducing a company’s AFN.
6. Cross Rates:
a) Do problem 19-2 on page 672. (Fundamentals of Financial Management, 13th Edition)
b) Create your own problem. Choose any two currencies and then calculate and explain their current cross rate.
Sub-Competency 6: Calculate cross rates between any two currencies.
Learning Objective 6.1: Calculate the cross rates between two currencies.
Learning Objective 6.2: Write and solve an original cross rate problem.
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