This problem Set is based on materials covered in modules 7 and 2/weeks 7 and 8. It is designed for you to demonstrate your understanding of basic working capital management concepts, dividend policy, and international financial management. Before you start this assignment, please review weeks 7 and 8 materials thoroughly. Part 1: Working Capital Management 1. Adams Stores, Inc. is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Adams’ sales last year (all on credit) were $150,000, and it earned a net profit of 6%. It turned over inventory 7.5 times, during the year and its DSO was 36.5 days. Its annual cost of goods sold was $121,667. The company had fixed assets totally $35,000. Adams’ payable deferral period is 40 days.
A. Calculate Adams’ cash conversion cycle
B. Calculate assets turnover and return on assets (ROA)
C. As one of the managers at Adams Stores, Inc, you believe the annual inventory turnover can be raised to 9 times without affecting sales. What would Adams’ cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?
2. Assume the company work for reported sales of $10 million and an inventory turnover of 2. The company is now adopting a new inventory system as part of its working capital management. If the new system is able to reduce the company’s inventory level and increase inventory turnover ratio to 5 while maintaining the same level sales, how much cash will be freed up as a result of the new inventory system. Part 2: Dividend Policy: Assume that you were recently hired by a national consulting firm, which has been asked to help Adams, Stores, Inc. prepare for its public offering. Prepare a presentation in which you review the theory of dividend policy and discuss the following:
A. The terms "irrelevance," "bird-in-the-hand," and "tax preference" have been used to describe three major theories regarding the way dividend payouts affect a firm’s value. Explain what these terms mean, and briefly describe each theory.
B. What do the three theories indicate regarding the actions management should take with respect to dividend payout?
C. What are stock repurchases? Discuss the advantages and disadvantages of a firm’s repurchasing its own shares.
D. What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and stock splits?
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