University of Phoenix th May 15 , 2009

Cash Conversion Cycle

Presented By: Junaid Khan

Example: CyberDragon Corporation

CyberDragons Balance Sheet ($000)

Assets:
Cash Marketable securities Accounts receivable Inventories Total current assets Plant and equipment less accum deprec. Net plant & equip. Total assets $2,540 1,800 18,320 27,530 50,190 43,100 11,400 31,700 81,890

Liabilities & Equity:

Accounts payable Notes payable Accrued taxes payable Other current liabilities Total current liabilities Long-term debt (bonds) Total liabilities Common stock ($10 par) Paid in capital Retained earnings Total stockholders' equity Total liabilities & equity 9,721 8,500 3,200 4,102 25,523 22,000 47,523 13,000 10,000 11,367 34,367 81,890

Sales (all credit) $112,760 CyberDragons Income Cost of Goods Sold (85,300) 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 Earnings retained in the firm Shares outstanding (000) Market price per share Book value per share Earnings per share Dividends per share

$2,800
2,216 1,300

20
26.44 3.86 2.15

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

Calculating CCC
CCC = ITOP + DSO - DPO, where, ITOP = 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 DSO 49.17

1995 49.14

1996 42.96

1997 37.79

1998 34.88

1999 39.14

2000 36.76

2001 31.46

2002 29.82

ITOP
DPO

40.28
44.88

34.16
57.91

31.01
38.73

20.25
63.71

9.13
62.00

6.49
61.16

6.01
63.49

5.65
60.99

4.80
72.22

CCC

44.57

25.39

35.24

(5.67)

(17.99) (15.53) (20.72) (23.88) (37.59)

THANK YOU
QUESTIONS PLEASE