Chapter 3
Answers to Review Problems
Finance For Executives – 4th Edition
1. Transactions.
NLF WCR NSF NET
PROFIT
2. Constructing a managerial balance sheet.
Capital employed
In millions
3. Reconstructing a balance sheet.
Sales
20 days of sales = $400,000
Accounts receivable
Inventory
Inventory = Sales/6
Working capital requirement (WCR):
Accounts payable
Since WCR = (Accounts receivable + Inventory) – Accounts payable,
Invested Capital
In millions
Cash $661 Cash and cash equivalents + Short-term investment
Working Capital Requirement 1,589 Merchandise inventories
Net fixed assets 23,435 Property and equipment
Net fixed assets
Net fixed assets = Total assets – Current assets
Short-term debt
Financial debt = Liabilities – Accounts payable
Long-term debt
Long-term debt = Financial debt – Short-term debt
Owners’ equity
Owners’ equity = Total assets – Liabilities
Balance Sheet
4.
Effect of transactions on working capital requirement.
5. Managing liquidity.
a. Wrong.
From where would the cash come from to repurchase shares or reimburse short-term debt?
Assets Liabilities
b. Wrong.
By writing down inventories, profits will go down and as a consequence, so will owner’s equity and net
c. Wrong.
Accounts receivable will increase, as will working capital requirement and, as a result the cash holdings
d. Right.
The bank will receive less income from the firm but, since the decrease in working capital requirement is
6. The cash-to-cash conversion period.
Cash-to-cash conversion period = Inventory period + Collection period – Payment period
Collection period =
365/sales Net
receivableAccounts
days3.91
365/000,000,2$
000,500$
Days of inventories=Inventories
Cost of goods sold
¿$400,000
$1,300,000 =112.3days
Payment period =
s)/365inventoriein Change sold goods of Cost(
payableAccounts
365/Purchases
payableAccounts
=
7. Industry effect on the working capital requirement.
a.
in millions Firm 1 Firm 2 Firm 3 Firm 4 Firm 5
Working capital requirement (WCR) = Accounts receivable + Inventories + Prepaid expenses
Firm 1
Working capital requirement-to-revenue ratio
Collection period days =
365/venueRe
receivableAccounts
=
365/428$
78$
= 67 days (rounded)
Inventory turnover =
sInventorie
venueRe
=
299$
428$
= 1.4
Firm 2
Working capital requirement-to-revenue ratio
Collection period days =
365/venueRe
receivableAccounts
=
365/498,3$
63$
= 6.6 days (rounded)
Inventory turnover =
sInventorie
venueRe
=
84$
498,3$
= 41.64
Firm 3
Working capital requirement-to-revenue ratio
Collection period days =
365/venueRe
receivableAccounts
=
365/870,21$
385,5$
= 90 days (rounded)
Inventory turnover =
sInventorie
venueRe
=
463,3$
870,21$
= 6.3
Firm 4
Working capital requirement-to-revenue ratio
Collection period days =
365/venueRe
receivableAccounts
=
365/804,166$
341,1$
= 2.9 days (rounded)
Inventory turnover =
sInventorie
venueRe
=
793,19$
809,166$
= 8.4
b.
Firm 1 is The Robert Mondavi Corporation: Inventory turnover is low, reflecting aging wine. The
amount of accounts payable is low reflecting a low level of purchases, which is not surprising since most
Firm 2 is Carnival Corporation: The negative working capital requirement is the result of a large
Firm 3 is Dow Chemical Company: The working capital requirement-to-revenue ratio is positive and
Firm 4 is Wal-Mart Stores, Inc.: The working capital requirement-to-revenue ratio is very low and