Posted: March 18th, 2023
Amazon’s cash cycle so much shorter than that of competitor Barnes & Noble? How does this comparison affect financial management decisions of other retailers?
There are several reasons which explain why the Amazon Company has a shorter cash cycle than its competitor Barnes & Noble. First and foremost, Amazon is a much bigger company than Barnes & Noble both in terms of income and in the number of products that it sells. While Barnes & Noble sells some things besides book and ebooks, this is their primary product. Amazon sells everything including books, although this is a very small portion of their income. Another reason for this is that Amazon is doing better financially than Barnes & Noble. The ebook trend has bitten into Barnes & Noble’s income, which they tried to combat by creating their own ereader, the Nook but this was far less successful than the Amazon ereader, Kindle and then Kindle Fire. Unlike Amazon which is highly diversified, Barnes & Noble is dependent on book sales which have continued to decline. Other retailers might look at this scenario and decide to lessen their interests in the sale of print books and to diversify their product so as not to be dependent on any one department.
2. How does Boeing achieve a cash cycle of 100 days?
Given that Boeing, in this scenario, had an inventory of 61 days and a receivables period of 45 days, this explains why its operating cycle is considered 106 days. It had a payables period of 183 days and a cash cycle of negative 77 days. Analyzing these numbers, it is clear that the cash cycle is determined by comparing the days in the operating cycle with the days in the payables period. So, if there were a difference of 100, this would give Boeing a cash cycle of 100 days.
3. Define the following terms as they apply to our work in FIN 201 in ten words or less:
Capital structure: the way a corporation finances its assets
Working capital: capital of a business used in day-to-day operations
Assets: thing that derives value because of contractual claim
Liabilities: financial obligation to pay money, goods, or services
Retained earnings: portion of income retained by the corporation instead of distributed
Liquidity: liquid assets; cash
Leverage: use of financial devices to increase return on investment
Sarbanes-Oxley: Public Company Accounting Reform and Investor Protection Act
GAAP: generally accepted accounting principles
Market value vs. book value: book value is price paid, market value is current price it could be sold for Depreciation: reduction in the value of an asset over time
Straight-line vs. accelerated depreciation: straight-line: equally over time, accelerated: more loss in present
Solvency: ability to meet obligations
Profitability: quality of affording gain, benefit, or profit
Pv: present value
Fv: future value
PVA: present value of an annuity
FVA: future value of an annuity
Simple interest: interest paid on principal alone
Compound interest: interest calculated on both principal and accrued interest
Discount rate: minimum interest rate set by Federal Reserve for lending
Rule of 72: divide the compound return into 72 to determine years needed to double money
Annuity: fixed sum of money paid to someone each year
Required return formula: required rate of return on investment
NPV: net present value
NPV decision rule: must be based on cash flow/value
Payback: period of time in which a debt or obligation can be repaid
IRR: internal rate of return
Formula for cost of equity: dividends per share divided by current market value of stock
Formula for cost of debt: before-tax-cost-of-debt times (1 – tax-rate)
WACC: weighted average cost of capital
Credit facility: any credit source extended to a government, business or group
Venture capital: capital invested in a project where there is risk
Operating cycle: business cycle from startup to the profit
Inventory period: time scheduled between replenishing orders
Accounts receivable period: time between sale of inventory and collection of money
Cash cycle: time between cash disbursement and cash collection
Profit margin: amount by which revenue from sales exceeds costs
ROE: return on equity
Debt/equity ratio: financial ratio indicating proportion of shareholders’ equity and debt
4. You expect to earn 8% per year on your investment. If you invest $3,000 today, how much will your investment be worth in 9 years?
72/8 = 9 years to double
It will be worth $6,000.
5. You want to have $40,000 available to finance a trip around the world in 12 years. You estimate that you can earn 12% on your investment. How much do you need to deposit today to meet your goal?
72/12 = 6 years to double to $20,000
6. A new Grady White fishing boat costs $5,000 in 1979. Today, the very same boat costs around $40,000. Estimate the average annual inflation rate, using the Rule of 72.
7×100= 700% / 34 = 20.588%
7. You invest $2,000 today and expect to earn 9% per year. How many years will it take for your investment to grow to $32,000?
72/9 = 8 years to double to $4,000
16 years to = $8,000
24 years = $16,000
Ross, S., Westerfield, R. & Jordan, B. (2012). Fundamentals of Corporate Finance. 10th ed.
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