Corporate Finance Flashcards

Front

What is the purpose of managing working capital?

Back

To ensure businesses have sufficient liquidity to meet their short-term requirements, such as day-to-day operations.

Front

What can happen to a profitable company if it does not manage its working capital effectively?

Back

It may become insolvent if it does not have the cash to pay for its daily operations.

Front

How is working capital defined?

Back

It is the capital available for conducting day-to-day operations, usually the excess of current assets over current liabilities.

Front

What is the goal of working capital management for retailing companies?

Back

To invest the excess liquidity in maximizing the return on excess cash.

Front

What is the Cash Conversion Cycle (CCC)?

Back

It is the time a company spends on inventory until it converts it back to cash.

Front

What are the three main periods that contribute to the Cash Conversion Cycle?

Back

1. Inventory conversion period 2. Average collection period 3. Average payment period.

Front

How is the Cash Conversion Cycle calculated?

Back

CCC = Inventory conversion period + Average collection period - Average payment period.

Front

What is the theoretical CCC for ABC Company based on the provided illustration?

Back

2.0 months.

Front

What does a low cash level in a business risk?

Back

It runs the risk of bankruptcy.

Front

What is the consequence of holding too much cash in a business?

Back

It does not maximize the return on assets since cash does not earn interest on its own unless invested.