Question

Using the information provided, what is the length of the production cycle for the firm?

ESH Electrical SS5

Selected Income Statement Items, 2019

Cash Sales RM1,500,000

Credit Sales RM7,500,000

Total Sales RM9,000,000

COGS RM6,000,000

ESH Electrical SS5

Selected Balance Sheet Accounts

12/31/2019 12/31/2018 Change

Accounts Receivable RM270,000 RM240,000 RM30,000

Inventory RM125,000 RM100,000 RM25,000

Accounts Payable RM110,000 RM90,000 RM20,000

Select one:

a. 7.60 days

b. 6.84 days

c. 6.08 days

d. 53.33 days

The next dividend (Div1) is RM1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price, according to the constant growth dividend model?

Select one:

a. RM31.80

b. RM30.00

c. RM30.80

d. RM15.00

In January, Imea Furniture's beginning cash is RM75,000, its cash sales are RM150,000, its accounts receivable payments RM300,000, and there are no other cash inflows for month. Meanwhile, for the same month’s accounts payable payments are RM250,000, its wages and salaries are RM300,000, its interest payments are RM25,000, and no other cash outflows for the month. What is its net cash flow and ending balance for January respectively?

Select one:

a. RM40,000, RM115,000

b. RM15,000, RM90,000

c. RM-125,000, RM-50,000

d. RM-100,000, RM-25,000

Answer 1

Solution

1. The solution is b. 6.84 days

The length of the production cycle is the point from receipt of raw material from the vendor to the point of its conversion into finished inventory. This is represented by the inverse of the Inventory Turnover ratio multiplied by the days in a year.

Inventory Turnover = COGS / Average Inventory

COGS = RM 6,000,000

Average Inventory = (Closing Inventory + Opening Inventory) / 2

= (125,000 + 100,000) / 2 = 225,000 / 2

= RM 112,500

Inventory Turnover = 6,000,000 / 112,500

= 53.33 times

This is interpreted as raw material converted into finished inventory 53.33 times in 365 days.

Hence the cycle of coversion or the production cycle lasted for 365 / 53.33 = 6.84 days

2. The solution is b. RM 30

As per Constant Growth Model

P = D / (r-g)

next dividend, D = RM 1.80

required rate, r = 12% or 0.12

growth rate, g = 6% or 0.06

P = 1.80 / (0.12 - 0.06) = 1.80 / 0.06

P = RM 30

3. The solution is c. RM-125,000, RM-50,000

Net cash flow = Cash sales + accounts receivable payments - accounts payable payments - wages and salaries - interest payments

= RM150,000 + RM300,000 - RM250,000 - RM300,000 - RM25,000

= - 125,000

Ending balance = Beginning cash + Net cash flow = RM75,000 - RM125,000 = -50,000