Corporate Finance Flashcards

The cash conversion cycle (CCC) measures:

Answer: The net time between paying for inventory and collecting cash from customers

CCC = Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding, measuring the net time cash is tied up in the operating cycle.

A decrease in the cash conversion cycle generally indicates:

Answer: Improved efficiency in managing receivables, inventory, and payables

A shorter CCC means the firm converts its inventory and receivables into cash more quickly, improving liquidity and reducing the need for external short-term financing.

Which short-term financing instrument typically offers the lowest cost for large, creditworthy corporations?

Answer: Commercial paper issued directly in the money market

Commercial paper allows large creditworthy firms to borrow directly from investors at money-market rates, which are typically lower than bank lending rates.

The current ratio is calculated as:

Answer: Current assets divided by current liabilities

The current ratio equals current assets divided by current liabilities, measuring the firm's capacity to cover short-term obligations with short-term assets.

Just-in-time (JIT) inventory management primarily aims to:

Answer: Minimize inventory carrying costs by receiving materials only as needed for production

JIT minimizes inventory investment and holding costs by synchronizing deliveries with production schedules so materials arrive exactly when needed.

An aggressive working capital financing strategy is characterized by:

Answer: Financing current assets primarily with short-term debt to reduce interest costs

An aggressive strategy relies on short-term financing for current assets to lower financing costs, accepting higher liquidity risk relative to a conservative approach.