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Financial Management: Cash Conversion Cycles

1. How do the following circumstances affect the cash conversion cycle:
(a) favorable credit terms allow the firm to pay its accounts payable slower
(b) inventory turnover increases
(c) accounts receivable turnover decreases?
2. What are some things you could do to speed up the cash conversion cycle?
3. What are some of the downsides of accepting an investment from venture capitalists?
4. Describe the primary methods firms use to raise capital.
5. What is the difference between business risk and financial risk?
6. Describe what capital structure is and what is meant by the optimal capital structure.
7. Stock valuation - how do markets and investors value a stock?

Solution Preview

Step 1
a) Favorable credit terms that allow the firm to pay its accounts payable slower reduce the cash conversion cycle. The company has more time to pay for its purchases.
b) Inventory turnover increases, means the days inventory outstanding reduces. The cash conversion cycle becomes shorter.
c) Accounts receivable turnover decreases, means days sales outstanding increases. This will increase the length of the cash cycle.

Step 2
Cash conversion cycle is the length of time in days that it takes for a company to convert its inputs into cash flows. It measures how long the business will be deprived of cash if it increases its investment in resources to expand customer sales. The things that can be done to increase the cash conversion cycle are giving shorter credit to customers, negotiating longer credit from suppliers, and speeding up the turnover of inventory. Making use of inventory optimization techniques decreases the time between cash cycles.

Step 3
Some of the downsides of accepting capital from venture capitalists are the venture ...

Solution Summary

Important financial issues are discussed step-by-step in this solution. The response also has the sources used.

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