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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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 2018 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.

  1. a. Calculate Chastain's cash conversion cycle.
  2. b. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA.
  3. 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 2018?

a.

Summary Introduction

To Determine: The cash conversion cycle of Corporation C.

Introduction: The cash conversion cycle is a cash flow estimation that endeavours to quantify the time it takes an organization to change over its investment in inventory and other asset contributions to money.

Explanation

Determine the total inventory

TotalInventory=[SalesInventoryTurnoverRatio]=[$121,0007]=$17,285.71

Therefore the total inventory is $17,285.71

Determine the inventory conversion period

InventoryConversionPeriod=[TotalInventoryCostofGoodsSoldperday]=[$17,285.71($121,000365)×80%]=[$17,285

b.

Summary Introduction

To Determine: The total assets turnover and ROA.

c.

Summary Introduction

To Determine: The cash conversion cycle, total assets turnover and ROA.

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