This week’s discussion is related to the “cash conversion cycle” discussed in chapter 21. The CCC is a working capital metric used to evaluate the efficiency of a company’s inventory, AR, and AP turnover, and its relation to the company’s working capital.
Using research, discuss the following:
1) Why can’t most companies have a negative cash conversion cycle like Amazon and Dell have experienced? What advantages does this provide to Amazon and Dell?
2) What could KB Homes and Toll Brothers do to reduce their CCC’s? Why would they want to do this?
Richmond Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
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