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  • Working Capital Policy

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    Naima Hossain
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    This document provides a summary of 3 key financial metrics - cash conversion cycle, total asset turnover, and return on assets (ROA) - for a company called Howe Corporation under two inventory turnover scenarios. Under the initial scenario where inventory turnover is 6 times, the cash conversion cycle is 56 days, total asset turnover is 0.697, and ROA is 4.18%. Under an alternative 8 times inventory turnover scenario, the cash conversion cycle improves to 41 days, total asset turnover increases slightly to 0.72, and ROA also improves to 4.31%.

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    Titolo originale

    Working capital policy

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    This document provides a summary of 3 key financial metrics - cash conversion cycle, total asset turnover, and return on assets (ROA) - for a company called Howe Corporation under two inventory turnover scenarios. Under the initial scenario where inventory turnover is 6 times, the cash conversion cycle is 56 days, total asset turnover is 0.697, and ROA is 4.18%. Under an alternative 8 times inventory turnover scenario, the cash conversion cycle improves to 41 days, total asset turnover increases slightly to 0.72, and ROA also improves to 4.31%.

    Copyright:

    © All Rights Reserved
    Scarica in formato PDF, TXT o leggi online su Scribd
    Segnala contenuti inappropriati
    9 visualizzazioni5 pagine

    Working Capital Policy

    Caricato da

    Naima Hossain
    This document provides a summary of 3 key financial metrics - cash conversion cycle, total asset turnover, and return on assets (ROA) - for a company called Howe Corporation under two inventory turnover scenarios. Under the initial scenario where inventory turnover is 6 times, the cash conversion cycle is 56 days, total asset turnover is 0.697, and ROA is 4.18%. Under an alternative 8 times inventory turnover scenario, the cash conversion cycle improves to 41 days, total asset turnover increases slightly to 0.72, and ROA also improves to 4.31%.

    Copyright:

    © All Rights Reserved
    Scarica in formato PDF, TXT o leggi online su Scribd
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    di 5

    Course Code: FIN427

    Course Title: Corporate Finance ||

    Course Section : 1

    Homework Number: 1

    Student Name: Naima Hossain

    Student ID number: 17304091

    Date of Submission

    9th July, 2020


    Answer 1

    Here,

    Sales = 2000,000

    Fixed assets = 1000,000

    Debt to asset rate = 60%

    Interest cost = 80% of debt

    Tree alternatives are given regarding the projected current asset level, they are 45% , 50% &
    60%.

    Earnings before interest and taxes = 12% of total sales

    And tax rate = 40%

    Restricted, 45% Moderate, 50% Relaxed, 60%


    sales 2000,000 2000,000 2000,000
    Current assets 900,000 1000,000 1200,000
    Fixed assets(+) 1000,000 1000,000 1000,000
    Total asset 1900,000 2000,000 2200,000
    Total debt(-) 1140,000 1200,000 1320,000
    Total equity 760,000 800,000 880,000

    Restricted, 45% Moderate, 50% Relaxed, 60%


    EBIT 240,000 240,000 240,000
    Interest(-) 91,200 96,000 105,600
    EBT 148,800 144,000 134,400
    Tax(-) 59,520 57,600 53,760
    EAT 89,280 86,400 80,640
    ROE 11.75% 10.8% 9.16%
    Answer 2

    Here,

    Sales = $ 1500,000

    Net profit = 6% or $9,000

    Fixed asset = 40,000

    Howe Corporation turned over its inventory 6 time during the year,

     ICP/360 = inventory/ cogs.


     360/ICP = cogs. / inventory
     360/ICP = 6 times turnover inventory
     ICP = 360/6
     ICP = 60 days
    DSO = 36 days
    DPO = 40 days

    a) Howe corporation’s cash conversion cycle, CCC = ICP+ DSO- DPO


    = 60+ 36- 40
    =56 days

    b) Turns on inventory = cost of goods sold/ inventory

     6 = 150000/ inventory
     Inventory = 150000/6
     Inventory = 25000
    Total asset = 150,000 + 40,000 + 25,000

    = 215,000

    *Total asset turnover = net sale/ average total asset

    = 150,000/ 215000

    = 0.697
    And, *ROA = operating income/ total asset

    = 9,000/ 215,000

    = 4.18%

    c) If Howe Corporation turned over its inventory 8 time during the year,

     ICP/360 = inventory/ cogs.


     360/ICP = cogs. / inventory
     360/ICP = 8 times turnover inventory
     ICP = 360/8
     ICP = 45 days

    Cash conversion cycle, CCC = ICP+ DSO- DPO

    = 45+ 36- 40
    = 41 days

    Turns on inventory = cost of goods sold/ inventory

     8 = 150000/ inventory
     Inventory = 150000/8
     Inventory = 18,750

    Total asset = 150,000 + 40,000 + 18,750

    = 208,750

    *Total asset turnover = net sale/ average total asset

    = 150,000/ 208,750

    = 0.72

    And, *ROA = operating income/ total asset


    = 9,000/ 208,750

    = 4.31%

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