University of Phoenix th May 15 , 2009

Cash Conversion Cycle

Presented By: Junaid Khan

Example: CyberDragon Corporation

CyberDragons Balance Sheet

($000)
Assets: Liabilities & Equity:
Cash $2,540 Accounts payable 9,721 Marketable securities 1,800Notes payable 8,500 Accounts receivable 18,320 Accrued taxes payable 3,200 Inventories 27,530 Other current liabilities 4,102 Total current assets 50,190 Total current liabilities 25,523 Plant and equipment 43,100 Long-term debt (bonds) 22,000 less accum deprec. 11,400 Total liabilities 47,523 Net plant & equip. 31,700 Common stock ($10 par) 13,000 Total assets 81,890 Paid in capital 10,000 Retained earnings 11,367 Total stockholders' equity 34,367 Total liabilities & equity 81,890

Sales (all credit) $112,760 CyberDragons Cost of Goods Sold (85,300) Income Statement Gross Profit 27,460 Operating Expenses: Selling (6,540) General & Administrative (9,400) Total Operating Expenses (15,940) Earnings before interest and taxes (EBIT) 11,520 Interest charges: Interest on bank notes: (850) Interest on bonds: (2,310) Total Interest charges (3,160) Earnings before taxes (EBT) 8,360 Taxes (assume 40%) (3,344)

Net Income

5,016

CyberDragon
Other Information
Dividends paid on common stock $2,800 Earnings retained in the firm 2,216 Shares outstanding (000) 1,300 Market price per share 20 Book value per share 26.44 Earnings per share 3.86 Dividends per share 2.15

1. Liquidity Ratios
Do we have enough liquid assets to meet approaching obligations?

Calculating CCC
CCC ITOP = ITOP + DSO - DPO, where, = Inventory Turnover Period = Inventories/Daily COGS DSO = Days Sales Outstanding = Accounts Receivables / Daily Sales DPO = Days Payables Outstanding = Accounts Payables/Daily COGS
*COGS = Cost of Goods Sold

Calculating CCC for Cyber Dragon

CCC = ITOP + DSO - DPO ITOP = Inventories/Daily COGS = $27,530 / (85,300/360) DSO = Accounts Receivables / Daily Sales = $18,320 / (112,760/360) DPO = Accounts Payables/Daily COGS = $9,721 / (85,300/360)

Calculating CCC for Cyber Dragon

CCC = ITOP + DSO - DPO ITOP = Inventories/Daily COGS = $27,530 / 236.94 DSO = Accounts Receivables / Daily Sales = $18,320 / 313.22 DPO = Accounts Payables/Daily COGS = $9,721 / 236.94

Calculating CCC for Cyber Dragon

CCC = ITOP + DSO - DPO ITOP = Inventories/Daily COGS = $27,530 / 236.94 = 116.19 days DSO = Accounts Receivables / Daily Sales = $18,320 / 313.22 = 58.49 days DPO = Accounts Payables/Daily COGS = $9,721 / 236.94 = 41.08 days

Calculating CCC for Cyber Dragon

CCC = ITOP + DSO DPO = 116.19 + 58.49 41.08 = 174.68 - 41.08 = 133.60 Days

What IF: CCC for Cyber Dragon

CCC = ITOP + DSO DPO = 116.19 + 58.49 174.68 = 174.68 - 174.68 Then: CCC = _______ Days

What IF: CCC for Cyber Dragon

CCC = ITOP + DSO DPO = 116.19 + 58.49 194.68 = 174.68 - 194.68 Then: CCC = _______ Days

SO: CCC for Cyber Dragon

If CCC is Positive = 133.60 Days, then the company has to invest funds in its daily operations for a longer period, which means it is more expensive, (but less risky).

SO: CCC for Cyber Dragon

BUT If CCC is = Zero Days, then the company does not have to invest funds in its daily operations, which means it is less expensive than a positive CCC (but more risky).

SO: CCC for Cyber Dragon

BUT If CCC is Negative = -20 Days, then the company does not have to invest funds in its daily operations, plus it has excess funds available, which means it is even less expensive than a zero days CCC (but even more risky).

Dell Corp.s CCC 1994-2002

(Financial Management: Principles & Applications, Keown Et al, 10th ed, 2005, pg 652,)

1994 1995 1996 1997 1998 1999 2000 2001 2002 DSO ITOP DPO CCC 49.17 49.14 42.96 37.79 34.88 39.14 36.76 31.46 29.82 40.28 34.16 31.01 20.25 9.13 6.49 6.01 5.65 4.80

44.88 57.91 38.73 63.71 62.00 61.16 63.49 60.99 72.22 44.57 25.39 35.24 (5.67) (17.99)(15.53)(20.72)(23.88)(37.59)

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