1.Analyze the differences between gross working capital, net working capital, and net operating working capital and their relationship to the cash conversion cycle. The company owner is considering a new venture that would require an additional $50,000 every month in inventory from a supplier over the next year. (Note: Use your creativity to come up with such a venture that can serve as a basis for your recommendations.) Explain the various short-term financing options available, including the advantages and disadvantages of each source. What do you recommend and why? Assume that the company has an inventory conversion period of 64 days, an average collection period of 28 days, and a payables deferral period of 41 days. What is the length of the cash conversion cycle? If annual sales are $2,578,235 and all sales are on credit, what is the investment in accounts receivable? How many times per year does the company turn over its inventory? Assume that the cost of goods sold is 75% of sales. Use sales in the numerator to calculate the turnover ratio. Compare the cash conversion cycles of two competitors of your company using the following facts: Competitor A Inventory conversion period = 88 days Average collection period (ACP) = 54 days Payables deferral period = 30 days Competitor B Inventory conversion period = 90 days ACP = 44 days Payables deferral period = 30 days Assume that the company's sales are expected to increase from $5 million in 2020 to $6 million in 2021, or by 20%. Its assets totaled $3 million at the end of the prior fiscal year. The company is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2020, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds needed for the coming year. The company's leadership team is very concerned about funding growth with new debt, given the existing liabilities. Propose strategies the company might consider reducing its AFN. In your financial analysis, you have identified opportunities in Israel to expand operations. The company owner wants to know if it may be more advantageous to exchange U.S. dollars for Japanese yen first and then obtain Israeli shekels to invest. You observed that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.58 Israeli shekels or for 109 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged? Based on your calculations, what are the options available to the company and potential financial benefits of each? What strategy do you recommend? 1: Gross Working Capital, Net Working Capital, and Net Operating Working Capital provides a thorough and detailed analysis of the differences between gross working capital, net working capital, and net operating working capital and their relationship to the cash conversion cycle. 2: Short-Term Financing Options provides a thorough and detailed proposal of the various short-term financing options available, the advantages and disadvantages of each source, what option they would recommend, and why. 3: Cash Conversion Cycle calculate the length of the cash conversion cycle. 4: Investment in Accounts Receivable calculate the investment in accounts receivable if annual sales are $2,578,235 and all sales are on credit.. 5: Turning Over Inventory calculate how many times per year the company turns over its inventory, assuming that the cost of goods sold is 75% of sales. 6: Comparing Cash Conversion Cycles provides a thorough and detailed comparison of the cash conversion cycles of two competitors of their company using the provided facts. 7: Forecasting Additional Funds Needed calculate the forecasting of the additional funds needed for the coming year using the provided information. 9: Cross-Exchange Rate Calculate the cross-exchange rate between the yen and the shekel. 10: Available Options provides a thorough and detailed summary of what options are available to the company, including the potential financial benefits of each and what strategy they would recommend. Reference Cash Conversion Cycle (a) Enter figures below Inventory Conversion Period days Average Collection Period days Payables Deferral Period days Cash Conversion Cycle 0 days (b) Annual Sales divided into 365 days 365 days Average Sales per Day $ - Average Collection Period 0 days Investment in Receivables $ - (c) Step 1: Inventory Balance Annual Sales $ - Cost of Goods Sold 75% percent of sales divided into 365 days 365 days Inventory Conversion Period 0 days $ - Inventory $ - Step 2: Inventory Turnover Ratio Annual Sales $ - Inventory $ - Turnover Ratio #DIV/0! times a year (d) Competitor A days days days 0 days Competitor B days days days 0 days Additional Funds Needed Last year's Sales Sales to Increase (in percent) Total Liabilities and Equity = Assets Accounts Payable Notes Payable Accrued Liability Profit Margin Retained Required increase in Assets #DIV/0! Spontaneous increase in Payables and Accruals #DIV/0! Increase in Retained Earnings $ - Assets/Sales #DIV/0! Next year's Sales (forecasted) $ - Change in Sales $ - Additional Funds Needed #DIV/0! Cross-Exchange Rate $1 to Israeli shekels $1 to Japanese Yen Cross-Exchange Rate #DIV/0! Yen/Shekel Future Value Present Value Interest Rate Interest Rate # of Periods # of Periods Starting Value Lump Sum in the Future Future Lump Sum $ - Present Value $0 Required Interest Rates Present Value in savings Future Value needed at retirement Additional funds Number of Periods years Required Interest Rate #NUM! a) Future Value of an Annuity a) Present Value of an Annuity Interest Rate Interest Rate # of Periods # of Periods Payments (per period) Payment per period Future Value $ - Present Value $0.00 b) Future Value of an Annuity b) Present Value of an Annuity Interest Rate Interest Rate # of Periods # of Periods Payments (per period) Payment per period Future Value $ - Present Value $0.00 c) Future Value of an Annuity c) Present Value of an Annuity Interest Rate Interest Rate # of Periods # of Periods Payments (per period) Payment per period Future Value $ - Present Value $0.00 Bond Valuation Face Value Yield to Maturity Coupon Bond C Coupon Bond Z Years to Maturity Price of Bond C Price of Bond Z 4 $0.00 $0.00 3 $0.00 $0.00 2 $0.00 $0.00 1 $0.00 $0.00 0 $0.00 $0.00 Price of each of the three bonds Basic Input Data Bond A Bond B Bond C Years to maturity Coupon rate Par value Periodic payment $0 $0 $0 Yield to maturity 9% 9% 9% Price $0.00 $0.00 $0.00 Current Yield Bond A Bond B Bond C Current yield #DIV/0! #DIV/0! #DIV/0! CAPM and Required Return Market Beta 1.0 Required Return Risk-Free Rate Market Premium 0.00% Your Company Risk-Free Rate 0.00% Market Premium 0.00% Company Beta Required Return 0.00% Closet Competitor Risk-Free Rate 0.00% Market Premium 0.00% Competitor's Beta Required Return 0.00% Difference in Required Return 0.00% Constant Growth Valuation Expected Dividend Constant Growth Required Rate of Return Current Value per Share #DIV/0! Non-Constant Growth Valuation Paid Dividend Non-Constant Growth x 2 years Constant Growth thereafter Required Rate of Return Cash Flow at Horizon or Continuing Date #DIV/0! Horizon Timeline Years 0 1 2 3 Dividends $0.0000 $0.0000 $0.0000 $0.0000 #DIV/0! Cash Flow #DIV/0! Present Value $0.0000 #DIV/0! $0.0000 Intrinsic Stock Value #DIV/0! Weighted Average Cost of Capital Debt Common Equity Cost of Debt Tax Rate Current Stock Price Last Dividend Paid Expected Constant Growth Next Dividend $ - Internal Equity #DIV/0! WACC #DIV/0! Capital Budgeting Criteria Year 0 1 2 3 4 5 6 7 Project A Project B Difference $0 $0 $0 $0 $0 $0 $0 $0 WACC 11% WACC 18% NPV @ 11% NPV @ 18% Project A $0.00 Project A $0.00 Project B $0.00 Project B $0.00 IRR @ 11% Project A #NUM! Project B #NUM! MIRR @ 11% MIRR @ 18% Project A #DIV/0! Project A #DIV/0! Project B #DIV/0! Project B #DIV/0! Discount Rate NPV-A NPV-B 0.0% $0 $0 10.0% $0 $0 11.0% $0 $0 18.1% $0 $0 20.0% $0 $0 24.0% $0 $0 30.0% $0 $0 Crossover Rate #NUM! Reference