Ch.9 Working Capital Metrics

Question 1

What is TVM?

Answer 1

• Concept that any given amount of money today is worth more in the future…through investments and earnings.

Question 2

What is Opportunity Cost?

Answer 2

• the value of the best alternative not taken when two or more mutually exclusive alternative are available.

Question 3

Current Ratio?

Answer 3

-Total Current Assets / Total Current Liabilities

the ratio of cash and assets expected to become cash in one year or less.

Question 4

Quick Ratio?

Answer 4

• Cash + ST investments + AR / Total Current Liabilities

Acid Test ratio…measure of liquidity

Question 5

How is Days Receivable Calculated?

Answer 5

-Days Recievable = AR x 365 / Revenues

Number of days required to convert a sale into cash.

Question 6

Cash Conversion Cycle Formula?

Answer 6

• Days Inventory + Days Recievable - Days Payables

Question 7

Situations where it makes sense to not take a cash discount

Answer 7

1. If the organization can earn a rate of return higher than the discount.
2. Organization does not have cash available to take the discount, but borrows at a higher rate than the discount
3. Stretching the AP, effectively beating the discount

Question 8

Importance to monitor Individual AR?

Answer 8

• Find errors in the payment processing that slow collections
• Find customers that intentionally delay payment
• Expose change in a financial condition that may alter the customers ability to make payment

Question 9

3 elements, opportunity cost of float, to consider when conducting a lockbox cost/benefit calculation

Answer 9

1. Dollar amount of the collected item
2. Total collection time for items
3. Companies current opportunity cost of funds

Question 10

Cost of Capital

Answer 10

• the misx of LT debt and equity on its balance sheet, the capital structure.