   Chapter 15, Problem 7P ### Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

#### Solutions

Chapter
Section ### Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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# CASH CONVERSION CYCLE Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastain’s 2016 sales (all on credit) were $121,000; its cost of goods sold is 80% of sales; and it earned a net profit of 2%, or$2,420. It turned over its inventory 7 times during the year, and its DSO was 37 days. The firm had fixed assets totaling $42,000. Chastain’s payables deferral period is 35 days. a. Calculate Chastain’s cash conversion cycle. b. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. c. Suppose Chastain’s managers believe that the inventory turnover can be raised to 9.9 times. What would Chastain’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.9 for 2016? d. e. a. Summary Introduction To determine: The cash conversion cycle. Introduction: Cash Conversion Cycle: It refers to the time period which starts from the production of the products to selling of the products and lasts until the time the customer receives the cash. Explanation Given information: The credit sales were$121,000.

The cost of goods sold is 80% of sales.

The net profit is 2% or $2,420. The inventory turnover ratio is 7 times. The day's sales outstanding are 37 days. The amount of total fixed assets is$42,000.

The payment deferral period is 35 days.

Calculation of the cash conversion cycle:

The formula to calculate the cash conversion cycle is,

CashConversionCycle=(Inventoryconversionperiod+AveragecollectionperiodPaymentdeferralperiod)

Substitute 52.14 days for inventory conversion period, 37 days for theaverage collection period and 35 days for the payables deferral period in the above formula.

CashConversionCycle=52.14+3735=54

b.

Summary Introduction

To determine: The total assets turnover and return on assets.

c.

Summary Introduction

To determine: The cash conversion cycle, total assets turnover and return on assets.

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