Problem:
Cash concersion cycle
Daniels Corporation has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80 percent of sales, and it finances working capital with bank loans at 8% rate. What is Danielâ??s Corp cash conversion cycle? If Daniels Corp could lower its inventories and receivables by 10% each and increase its payables by 10%, all without affecting either sales or cost of goods sold, what would the new cash conversion cycle be, how much cash would be freed up, and how would that affect pre-tax profits? Show your work.
AFN equation
Jamson Corporation's sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20%. Its assets totaled $3 million at the end of 2005. Jamson is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2005, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 5%, and the forecasted retention ration is 30%. Use the AFN equation to forecast Jamson's additional funds needed for the coming year. Show your work.