BREAKEVEN ANALYSIS by 2t1gEC

VIEWS: 27 PAGES: 39

									          WORKING CAPITAL MANAGEMENT
I.CURRENT ASSET INVESTMENTS
    A.EFFECTS ON PROFITABILITY
    B.EFFECTS ON RISK
    C.OPTIMAL INVESTMENT IN CURRENT ASSETS

II.MATURITY STRUCTURE OF DEBT

III.WORKING CAPITAL POLICIES
     A.HEDGING POLICY
     B.AGGRESSIVE POLICY
     C. CONSERVATIVE POLICY

IV.FACTORS THAT AFFECT THE NEED FOR WORKING CAPITAL

V.CASH CONVERSION CYCLE

VI.SHORT-TERM FINANCIAL POLICY AND SOURCES OF FINANCE

VII.EVA AND WORKING CAPITAL
         I. CURRENT ASSET INVESTMENTS
Current assets are assets normally converted into cash within one
year.Working capital management involves the administration of current
assets and current liabilities.

Investment in current assets is more divisible than investment in fixed
assets.Difference in divisibility as well as durability of economic life are the
essential features that distinguish current from fixed assets.

Determining the appropriate levels of current assets and current liabilities,
which determine the level of working capital, involves decisions on the
firm’s liquidity and the maturity composition of its debt. In turn, these
decisions involve a tradeoff between profitability and risk.

The appropriate decision variable to examine on the asset side is the maturity
composition, liquidity, of the firm’s assets, that is the turnover into cash.Decisions
that affect liquidity of assets include the management of cash,and marketable
securities, credit policy and procedures, inventory management and control , and
the administration of fixed assets.
                            PROFITABILITY AND RISK

For current assets, the lower the proportion of current assets to total assets, the
greater is the firm’s rate of return, assuming that short term assets yield a return
that is less than the return on long term assets.

Profitability with respect to current liabilities relates to differences in costs between
various methods of financing and to the use of financing when it is not needed. To
the extent that short-term explicit costs of financing are lower than those of
intermediate and long term financing,(upward sloping yield curve) the greater the
proportion of short- term debt to long –term debt, the higher the profitability of the
firm. Although short-term rates sometimes exceed long-term rates , generally they
are less. Moreover, the use of short-term debt as opposed to long-term debt is likely to
result in higher profits because debt will be paid off during periods that it is not needed.

The profitability assumptions above suggest a lower proportion of current assets to total
assets and a high proportion of current liabilities to total liabilities.This will result in a low net
working capital, or negative working capital. Offsetting the profitability of this strategy is the
risk to the firm. In a legal sense , insolvency occurs whenever the assets of the firm are less
than its liabilities- a negative net worth.The risk associated with various levels of current
assets and current liabillities must be evaluated in relation to the profitability associated with
those levels.
A. EFFECTS OF CURRENT ASSET INVESTMENTS ON PROFITABILITY


In determining the level of current assets , management must
consider the tradeoff between risk and return. In this analysis ,
the assumption is that the management of receivables and
inventories is efficient and consistent throughout the range of
output.At every level of output, the investment in receivables
and inventories is predetermined. So, we are concerned with
cash and marketable securities portion of current assets. The
greater the output, the greater the need for investment in
current assets.The relationship is not linear since current
assets increase at a decreasing rate with output. This is based
upon the notion that it takes a greater proportional investment
in current assets when only a few units of output are produced
than it does later on when the firm can use its assets more
efficiently.
EXAMPLE 1: Suppose a firm expects sales of $ 2 million on 80,000 units of
output and expects a profit margin before interest and taxes(operating
profitability) of 10%. Fixed assets are $ 500,000 for the period and
management is considering asset positions of $ 400,000, $ 500,000, and $
600,000.
                                         A                B               C
      Sales                     $ 2,000,000        2,000,000         2,000,000
      EBIT                          200,000         200,000           200,000
      Current Assets                600,000           500,000          400,000
      Fixed Assets                  500,000          500,000           500,000
      Total Assets                1,100,000        1,000,000           900,000
       Current Liabilities         500,000            500,000         500,000
                                 Basic earning power
       (EBIT / Total assets)         18.2%             20.0%            22.2%
       Working Capital Turnover       3.3x              4.0x             5.0x
        CA/Sales                       0.30             0.25              0.20
       Current Ratio                  1.2x               1.0x             0.80x

Alternative A which provides the highest liquidity cushion against unexpected
demand for funds, gives the lowest rate of return as revealed by the basic earning
power ratio..
B. EFFECTS OF CURRENT ASSET INVESTMENTS ON RISK


In general, the greater the ratio of current assets to total
assets , the less risky the company’s working capital
policy.The firm will have sufficient cash and cash equivalents
to pay its its bills the greater the cushion.


In the above example , alternative C is the riskiest. The current ratio is
0.80 in alternative C where the current asset investment is lowest. A
current ratio below one reveals that the company is unable to meet its
current financial obligations with its current assets and the net working
capital is negative. Alternative A , has the lowest risk, the current assets
are twice as much as current liabilities and the company does not face the
risk of default.Alternative B lies in between where the current assets
exactly cover the current liabilities. There is no margin of safety .Under
uncertainty, a margin of safety should be built into the maturity schedule.
C. OPTIMAL SIZE OF INVESTMENT IN CURRENT ASSETS

Large investment in current assets implies:

1.Keeping large balances of cash and marketable securities
2.Making large investments in inventory
3.Granting liberal credit terms which results in large accounts
  receivable.

Determining the optimal level of investments in current assets
requires identification of the different costs of alternative short-
term financing policies.Managing current assets involves a
tradeoff between costs that rise with the level of investment,
called carrying costs and costs that fall with the increase in
curent assets, called shortage costs.
          C.1. Carrying costs: Carrying costs are generally of two types.
The cost of maintaining the economic value of the items such as, costs
of warehousing the inventory, insurance cost. Because the rate of return
on current assets is low compared to other assets,there is an opportunity
cost of the funds used in current asset investments.

         C.2. Shortage costs: Shortage costs are involved when investment in current
assets is low. If a firm runs out of cash and can’t readily sell marketable securities ,
it may need to borrow or default on an obligation.( cash-out)

If a firm has no inventory ( stock-out) or if it can not extend credit to its customers,it
will lose customer goodwill. There are two types of shortage costs:

a. Trading or order costs-Order costs are the costs of placing an order for more
cash ( brokerage costs) or more inventory ( production set-up costs)

b. Costs related to safety reserves- There are costs of lost sales, lost customer
goodwill, and disruption of production schedule.

If carrying costs are low and/ or shortage costs are high,the optimal policy calls for substantial
current assets.If carrying costs are high and/or shortage costs are low, the optimal policy will
be a moderate investment in current assets.
           II. MATURITY STRUCTURE OF DEBT
         FINANCING POLICIES FOR CURRENT ASSETS
In an ideal economy, short-term assets can always be
financed with short-term debt , and long-term assets can be
financed with long-term debt and equity.In this economy, net
working capital is always zero.

Current assets can not be expected to drop to zero in the real world
because a long-term rise in sales will result in some permanent investment
in current assets.A growing firm can have both a permanent requirement
for current assets and one for long-term assets.The long –term asset
requirement will reflect:

a.A secular growth trend

b.A seasonal variation around the trend

c.Unpredictable day to day and month to month fluctuations

Borrowing short-term and investing in fixed assets may be risky because the
company may not renew the loans. There is also interest rate uncertainty in short-
term borrowing.
A firm can reduce the risk of insolvency either by increasing the maturity schedule of
its debt or by increasing the relative maturity of its assets.

An exact synchronization of the schedule of expected future net cash flows and payment
schedule of debt is appropriate under conditions of certainty. Under uncertainty, the net cash
flows will deviate from expected cash flows in keeping with the business risk of the firm.The
margin of safety provided by the firm is the lag between the firm’s expected cash flow and its
contractual payments. The margin of safety will depend on the risk preferences of
management.

In general, the shorter the maturity of a firm’s debt obligations, the greater the risk that it will
be unable to meet the principal and interest payments.Committing the short –term funds to
long-term assets carries the risk that the firm may not be able to renew its borrowings.If the
company should fall on hard times, creditors may regard renewal as too risky and demand
immediate payment.This would cause the firm to go into bankruptcy. In addition, there is the
uncertainty associated with interest costs.When the firm finances with long-term debt it fixes
the interest rate over the maturity period of the funds. When short-term loans are used, there
is interest uncertainty upon refinancing( reinvestment rate risk) . Differences in risk between
short and long term financing must be balanced against differences in costs.When the yield
curve slopes upward, short-term debt is cheaper than long term debt.The longer the maturity
of a firm’s debt, the more costly the financing is likely to be. Financing short-term asset
fluctuations with long –term debt will require payment of interest on debt over periods of time
when the funds are not needed.

Short-term financing gives flexibility.If there is a probability that the firm’s need for funds will
decrease, the use of short-term debt permits debt to be paid off in keeping with the diminished
need for funds.
              III.WORKING CAPITAL POLICIES

The firm’s decision on the level of investment in current assets and the
maturity composition of debt will determine the working capital policy
adopted by the firm.


A. CONSERVATIVE POLICY

In the conservative policy,the firm makes heavy investments in current
assets. It finances all fixed assets plus all of the permanent current assets
and its fluctuating current assets with long-term debt and equity. There is
no short-term debt use in conservative policy. If expected cash flows
occur, the interest on debt will be paid during seasonal throughs when
 funds are not needed. The firm will have excess cash available for
 investment in marketable securities when total asset requirement falls
 from peaks.Because this implies chronic short-term surpluses and a
 large investment in net working capital, it is also called a flexible strategy.
B. AGGRESSIVE POLICY

In the aggressive policy, the level of current asset investment is low. There
is a negative margin of safety since current liabilities exceed current
assets.The company finances all fluctuating current assets, and a certain
portion of permanent current assets with short-term debt. The greater the
portion of permanent current assets financed with short-term debt, the
more aggressive the financing is said to be.

C. HEDGING POLICY

This is the zero net working capital situation with no margin of safety. Each
asset is matched with a financing instrument of the same approximate
maturity.Short-term or seasonal variations in current assets are financed
with short-term debt. Permanent current assets and fixed assets are
financed with long-term funds.A hedging approach to financing suggests
that as the firm has seasonal needs for funds , it borrows on a short-term
basis, paying off the loans as surplus cash is generated. In this case ,
financing is employed when it is needed. Fluctuating current assets are
expected to be financed with accounts payable and accruals that rise with sales.
Only the portion of fluctuating current assets that can not be financed by
spontaneous sources of finance is financed with short-term debt
IV. FACTORS THAT AFFECT THE NEED FOR WORKING CAPITAL
There are some factors that affect working capital requirement:

1. Uncertainty- The higher the uncertainty in the environment, the higher is the
need for margin of safety in working capital management.Thus there is higher
investment in current assets and more use of long-term funds.

2.Credit policy- Credit policy adopted by the firm involves discounts given in cash
sales, credit period, standards in extending credit and collection policy.
High cash discounts attracts new customers, and lowers DSO; shorter collection
period leads to reduction in receivables and tight credit standards reduce bad
debts.All of these policies lead to tight credit policy which reduces receivables but
may harm customer relations and discourage sales.

3.Seasonality- If sales of the firm is seasonal, there will be excessive investment in
some assets like inventories.This will raise the need for working capital.

4.Inflation- A high inflation rate, holding all else constant, will increase working
capital investment required to maintain the operations of the firm.

5.Growth rate- A firm that has a high rate of growth in sales will have to increase
investments in current assets which implies a higher need for financing.

6.Cash conversion period- A long cash conversion implies that cash is tied up in
asset accounts for long periods and that the firm needs external financing to
maintain its operations.
                     V. CASH CONVERSION CYCLE

Defining cash in terms of other elements:

Net working capital+ Fixed assets= Long-term debt+ Equity (1)

Net working capital= Cash+ Other current assets- Current liabilities (2)

Cash + Other current assets-Current Liabilities= Long-term debt+ Equity- Fixed assets (3)

Cash= Long-term debt+Equity- Net working capital(excluding cash)- Fixed assets (4)


Equation (4) shows that increasing long-term debt and equity and decreasing fixed
assets and net working capital (excluding cash) will increase the cash level of the
firm.

The short-term activities create petterns of cash inflows and outflows that are both
unsynchronized and uncertain. The operating cycle is the time interval between the
arrival of the inventory and the date when cash is collected from receivables.
The cash cycle begins when cash is paid for materials and ends when cash is
collected from receivables. The cash flow time line consists of an operating cycle
and a cash cycle. The need for short-term financial decision making is suggested
by the gap between the cash inflows and cash outflows.This is related to the
lengths of the operating cycle and the accounts payable period.This gap can be
filled either by borrowing or by holding reserve for marketable securities.The gap
can be shortened by reducing the inventory and receivables conversion period and
by increasing the payable period. The operating cycle is the sum of inventory
conversion period and receivable conversion period. The inventory conversion
period is the length of time required to order, produce and sell a product. The
accounts receivable conversion period is the length of time required to collect cash
receipts. The cash cycle is the time between cash payment for inventory
purchases and cash collections from receivables.

Cash cycle= Operating cycle- accounts payable period
Cash conversion cycle = Inventory conversion period + Receivables
                         conversion period-Accounts payable deferral period

The accounts payable period is the length of time the firm is able to delay payments
on the purchase of various resources such as raw materials, wages.

The firm’s goal is to shorten the conversion period as much as possible.The longer the cash
conversion cycle,the greater the need for external financing.
VI. SHORT TERM FINANCING POLICY AND SOURCES OF FINANCE


 A. Short-term financial policy is composed of at least two elements:

 1.The size of the firm’s investments in current assets:

 This is usually measured relative to the firm’s level of total
 operating revenues. A conservative short-term financial policy
 implies a high ratio of current assets to sales.An aggressive
 policy entails a low ratio of current assets to sales.

 2.The financing of current assets:

 This is measured as the proportion of short-term debt to long-
 term debt. An aggressive policy means a high proportion of
 short-term debt relative to long-term financing and a
 conservative policy means less short-term debt and more long-term debt.
B. Short- term financing sources include:

1.Accruals include the firm’s estimated taxes, social security premiums, and witheld employee payrolls. Accruals increase
  automatically as the firm’s operations expand.

2.Trade credit- Accounts payable generally represents 40% of current liabilities for an average nonfinancial corporation. This
  percentage is lower for smaller firms. This is a spontaneous source of financing that arises from business transactions.

3.Short-term bank loans- The bulk of bank lending is on short-term basis. A line of credit is a formal or informal understanding
  between the bank and the borrower indicating the maximum credit the bank will extend to the borrower.

 A revolving credit agreement is a formal line of credit often used by large firms.The bank has a legal obligation to honor a
 revolving credit agreement and it receives a committment fee .Neither the obligation nor the fee exist under a less formal
 line of credit.

4.Commercial paper is a type of unsecured promissory note issued by large, strong firms.Maturity ranges between one-to
  nine months.The rates on commercial paper fluctuates with demand and supply conditions.

5.Secured short-term loans- Loans are secured using several kinds of collateral including marketable securities like bonds, or
  stocks , fixed assets like land and building, equipment, or assets like inventory or receivables. Buildings are generally used
  as a security for long-term loans.Most secured short-term loans use receivables ,or inventories as collateral.

6.Accounts receivable financing involves either the pledging of receivables or the selling of receivables ( factoring).The
  pledging of accounts receivable is characterized by the fact that the lender not only has a claim against the receivables but
  has a recourse to the borrower.If the buyer of the goods fails to pay, selling firm takes the loss. Factoring or selling
  accounts receivable involves the purchase of accounts receivable by the lender without recourse to the borrower.Since the
  factoring firm asumes default on bad accounts, it must do a credit check.So factors provide a credit department to the
  borrower.

7.Asset based securities- ( VDMK) Institutions issue securities backed up by the receivables from their consumer credits,
  mortgage agreements, financial leasing and other billed receivables. The amount issued can not exceed 90% of the value
  of the receivables at the time of the issue.Eligible accounts receivable is defined as gross accounts receivable minus
  discounts and other credits, slow paying accounts ( 0ver 60 days past due at the date of invoice), foreign receivables due
  from affiliates and suppliers.
                  VII. EVA AND WORKING CAPITAL
Economic Value Added (EVA) is defined as:
    EVA= (NOPAT - (k x TOC)
             where
    NOPAT= Net operating profits after taxes
    k= Cost of funds
    TOC= Total operating capital

If a company reduces inventories, cash holdings or receivables, without
reducing sales , then cash will be freed up.This cash can be used to pay off
debt,or repurchase stock both of which reduce capital.If capital is reduced,
then financing costs will decline and this will raise EVA. The cash that
becomes free can also be reinvested into investments of higher
profitability which will increase NOPAT.

Working capital management is also related to ROE :
ROE= Net profit margin x Total asset turnover x equity multiplier
   = Net profit/ Sales x Sales/ Total assets x Assets/ Equity

If working capital or total assets can be reduced without adversely affecting sales,
this will increase profit margin ,and the total asset turnover, and increase ROE.
                        CASH           CONVERSION        PERIOD
                                  ( Speedy Maintenance Inc.)
DATA:
1.AVERAGE ACCOUNTS RECEIVABLE   = 65,000+85,000/ 2
                                = $ 75,000
2.ACCOUNTS RECEIVABLE TURNOVER = 430,500/ 75,000
                                = 5.74X
3.A/R CONVERSION PERIOD         = 365/ 5.74
                                 = 64 days
4.AVERAGE INVENTORY OF SUPPLIES = 18,000+ 21,000/ 2
                                 = 19,500
5.INVENTORY TURNOVER            = COGS*/ INVENTORY
                                 = 70,000/ 19,500
                                 = 3.59 X
6.INV.CONVERSION PERIOD          = 365/ 3.59
                                 = 102 days
7.AVERAGE ACCOUNTS PAYABLE      = 45,000+ 55,000/ 2
                                 = $50,000
8.ACCOUNTS PAYABLE TURNOVER      = COGS/ AV. A/P
                                 = 360,000/ 50,000
                                 = 7.2X
9.A/ P DEFERRAL PERIOD          = 365 / 7.2
                                 = 51 days
CASH CONVERSION PERIOD          = 64+ 102 – 51

                                        = 115 DAYS
This is COGS for supplies only.
                         FINANCING CASH FLOW CYCLE


Asset           Average Amount   Average Investment     Cost Of Financing
                   Invested           Period
                                                        10%   15%     20%

Inventories       $ 19,500         102 days           $ 545   $817   $ 1090

Accounts
Receivable        $ 75,000          64 days           $1315 $1973     $ 2630

Accounts
Payable           $ 50,000         ( 51 days)         $(699) $(1048) $(1397)



Total Cost of Finance              115 days           $ 1161 $1742    $ 2323
CASE I : BROWNING INC.
            A CASE        ON WORKING CAPITAL MANAGEMENT

Timothy Wong is recently hired as the financial manager of Browning Office
Furnishings,Inc. , a small manufacturer of metal office furniture. His first duty is to
develop a working capital policy. Wong has identified three potential policies.

An aggressive policy
A conservative policy
A moderate policy

The balance sheet will look as follows under the three policies:

                                           BALANCE SHEET

                  Aggressive                     Moderate                 Conservative
Current assets      $300                          $400                      $500
Net fixed assets     400                           400                        400
Total assets         700                           800                       900
Short term debt (8%) 400                           200                          0
Long term debt(10%)    0                           200                        400
Common equity        300                            400                       500
Total claims         700                            800                       900
Variable costs are expected to be 60% of sales regardless of which
working capital policy is adopted, but fixed costs would increase when
more current assets are held because of increased storage and insurance
costs. Annual fixed costs would be $ 200,000 under an aggressive policy,
$ 210,000 with a moderate policy, and $ 220,000 under a conservative policy.

Because its working capital policy would influence the firm’s ability to
respond to customers’ needs , sales are expected to vary under different
economic scenarios are as follows ( in thousands of dollars) :


                                      SALES

Economy             Aggressive                Moderate             Conservative

Strong               $ 1,000                  $ 1,050                  $ 1,100
Average                  800                      900                    1,000
Weak                     600                      750                      900
                                 QUESTIONS

1.What are the two basic decisions in formulating a working capital
  policy?

2.Construct income statements for Browning for each working capital policy
  assuming an average economy, a strong economy and a weak economy.
  Calculate ROE as well.

3.Assume that there is a 50 % chance of an average economy and a
 25 % probability for both a strong and a weak economy. What is the
 expected ROE under each policy? Are the policies equally risky?

4.Assume that the government adopts a tight monetary policy and
  increases interest rates.If the firm adopts the conservative policy, it will
  lock in its 10% long term cost. However, if it follows the aggressive
  policy, the short term rates increase by 4 % and this will increase short
  term debt cost to 12%. What impact would this have on the firm’s
  profitability under each of the working capital policies,in an average
  economy, as measured by ROE ?
ANSWERS TO SELECTED
     QUESTIONS
   BROWNING INC.
CASE II: SKI CORPORATION
                          SKI EQUIPMENT INCORPORATED (SKI)

Dan Barnes is the financial manager of SKI. The company’s founder recently
sold his 51% controlling block of stock to Mike Lafaro, who is a big fan of EVA(
Economic Value Added). EVA is found by taking the after tax operating profit and
then subtracting the dollar cost of all the capital the firm uses.

                EVA = NOPAT-CAPITAL COSTS
                    = EBIT(1-T)- WACC(CAPITAL EMPLOYED)

If EVA is positive , then the firm is creating value. On the other hand, if EVA is negative, the
firm is not covering its cost of capital and stockholders’ value is eroded. Lofaro rewards
managers randomly if they create value, but those whose operations create negative EVA is
soon looking for work. Lofaro frequently points out that if a company can generate its current
level of sales with less assets , it would need less capital. That would, holding all else
constant, lower capital costs and increase its EVA.

Shortly after he took control of SKI , he met with SKI’s senior executives to tell them of his
plans for the company. First he presented some EVA data which he convinced everyone
that SKI had not been creating value in recent years. He then stated, that this situation should
change. He noted that SKI’s design of skis, boots, and clothing are acclaimed throughout the
industry, but something is seriously amiss elsewhere in the company. Costs are too high,
prices are too low, or the company uses too much capital and he wants SKI’s managers to
correct the problem or else.
Kronk has long felt that SKI’s net working capital situation has to be studied- the company
may have the optimal amounts of cash , securities, receivables , and inventories, but it may
also have too much or too little of these items. In the past, the production manager resisted
Phil’s efforts to question his holdings of raw materials , inventories, the marketing manager
resisted questions about finished goods, the sales staff resisted questions about credit policy
(which affects accounts receivable) and the treasurer did not want to talk about her cash and
securities balances. Lofaro’s speech made it clear that such resistance would no longer be
tolerated.

Following are some ratios for SKI :
                                                               SKI             INDUSTRY
Current                                                       1 .75              2.25
Quick                                                          0.83                1.20
Debt/Assets                                                   58.76 %            50.00 %
Turnover of cash and securities                              16.67               22.22
Days sales outstanding                                       45.00               32.00
Inventory turnover                                             4.82                7.00
Fixed assets turnover                                        11.35                12.00
Total assets turnover                                          2.08                 3.00
Profit margin on sales                                         2.07 %               3.50%
Return on equity                                             10.45 %               21.00%
Payables deferral period                                     30.0                  33.0
                                                         QUESTIONS:
Phil wants everyone to think about how changes in each type of current asset would interact and affect EVA.

1.Based on the data, does SKI seem to be following a relaxed, moderate or restricted working capital policy?

2.How can one distinguish between a relaxed but rational working capital policy and a situation where a firm
  simply has lots of current assets because it is inefficient? Does SKI’s working capital policy seem
  inappropriate?

3.Calculate SKI’s cash conversion cycle? Assume 360 days/year.

4.Phil’s cash budget for the entire year is based heavily on his forecast of monthly sales.Sales are expected to
  be extremely low between May and September but then increase dramatically in fall and winter. November is
  the firm’s best month, when SKI ships equipment to retailers for the holiday season. Interestingly, Phil’s
  forecasted cash budget indicates that the company’s cash holdings will exceed the targeted cash balance
  every month except for October and November, when shipments will be high but collections will not be
  coming until later. The company has a target cash balance of $1.500.000.Based on its ratios , does it appear
  that SKI’s target cash balance is appropriate? In addition to possibly lowering the target cash balance , what
  actions might SKI take to improve its cash management policies, and how might that affect its EVA?

5.What reasons might SKI have for maintaining a relatively high amount of cash?

6.Is there any reason to think that SKI may be holding too much inventory?If so,how would that affect EVA and
  ROE?

7.SKI sells on the same credit terms as other firms in the industry.Using the above ratios, explain whether SKI’s
  customers pay less or more promptly than the industry.If there are differences , does this suggest that SKI
  should tighten or loosen its credit policy?What four variables make up a firm’s credit policy, and in what
  direction should each be changed by SKI and does SKI face any risks if it tightens its credit policy?

8.If the company reduces its DSO without seriously affecting sales, what effect would this have on its cash
  position (1) In the short run and (2) In the long run? Answer in terms of the cash budget and the balance
  sheet.What effect would this have on EVA in the long run?

9.SKI has excessive current assets in the firm in the form of cash, receivables and inventories.Why is its current
  ratio still lower than the industry?
ANSWERS TO SELECTED
    QUESTIONS
      SKI CASE

								
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