Chapter 3 - Cash holdings

Question 1

Cash conversion efficiency

Answer 1

OCF/Revenues

• The proportion of sales that yield operating cash flow*
• critical for LT viability*

Question 2

Cash conversion efficiency

Answer 2

OCF/Revenues

• Critical for firms’ LT viability*
• the proportion of sales that yield operating cash flow*

Question 3

Operating cash flow

Answer 3

net income plus depreciation and after adjusting for changes in the working capital accounts

Question 4

Interpreting CCE

Answer 4

negative = problems in converting sales into cash flow

*can be the result of generous credit terms and large inv holdings

Question 5

Cash ratio

Answer 5

cash/total assets

• the proportion of assets held in cash*
• a key measure used to assess liquidity*

Question 6

Interpreting cash ratio

Answer 6

Higher cash ratios imply an improved ability to weather uncertain conditions in product markets and the broader economy
cash holdings also increase agency and opportunity costs

Question 7

Cash burn rate

Answer 7

cash/(cogs/365)

the # of days of cogs that the firm can fund without receiving additional cash inflows or external financing

Question 8

Interpreting cash burn rate

Answer 8

increased burn rates imply a reducing likelihood of illiquidity

Question 9

Net liquid balance

Answer 9

Cash - NP
*the sum of cash and ST investments minus current nonspontaneous financial liabilities (ie. arranged financing), such as NP and current maturing debt

Question 10

Interpreting net liquid balance

Answer 10

A negative NLB indicates dependence on outside financing and suggests the minimum capacity needed from a credit line
A negative NLB does not mean the firm will default on debt obligations, but it does imply reduced liquidity
A greater NLB implies an increased amount of liquid resources available to fund the WCR

Question 11

How increase in WCR is funded and when each option is appropriate

Answer 11

1. drawing from the NLB - appropriate when the increase in WCR is seasonal
2. Raising financing through the aqcuisition of addl LT financing - appropriate when the increase in WCR is permanent

Question 12

Operating cash flow

Answer 12

net income + dep and after adjusting for changes in the working capital accounts

Question 13

If CCE is negative

Answer 13

suggests problems in converting sales into cash flow

Question 14

Cash ratio

Answer 14

Cash/Total assets

the stock of cash held on the balance sheet scaled by total assets

Question 15

How to interpret cash ratio

Answer 15

Higher cash ratios imply an improved ability to weather uncertain conditions in product markets and the broader economy
High cash holdings also increase agency and opportunity costs

Question 16

Cash burn rate

Answer 16

Cash/(COGS/365)

• liquidity measure involving the # of days for which the firm can cover ongoing expenses with cash on hand*
• the # of days of COGS the firm can fund with cash w/o receiving addl cash inflows or external financing*

Question 17

Interpretation of cash burn rate

Answer 17

Increased burn rate imply a reduced likelihood of illiquidity.

Question 18

Net liquid balance

Answer 18

Cash - NP
the sum of cash and ST investments minus current nonspontaneous financial liabilities (ie. arranged financing) such as NP and current maturing debt

Question 19

Interpreting net liquid balance

Answer 19

a negative NLB implies reduced liquidity