1. What are some of the characteristics of a firm with a long operating cycle? A long cash cycle? ( This is relating to short term financial planning chapter )
2. Are stockholders and creditors likely to agree on how much cash a firm should keep on hand? ( This is relating to Working capital management chapter )
3. Should there be both free trade and the free flow of capital across international borders? Why?
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What are some of the characteristics of a firm with a long operating cycle? A long cash cycle? #
Characteristics of the firm with the long operating cycle
The operating cycle supports the corporation to estimate the amount of working capital. This will be needed by the business for its growth. The operating cycle supports the company to determine the efficiency of the firm (Ross, Westerfield, & Jordan, 2008, pp. 626-630). Few of the characteristics if the firm with the long operating cycle includes
- This corporation has the shorter terms of the payment that is allowed to these company by the suppliers as they cannot delay the payment of the cash
- It requires a high amount of cash for maintaining its operations
- Their period of receivable are extensive
- They have the policy of credit for the clients who want to purchase on the credit and will take the intervals that are extensive for payment hence making their operating cycle long
- The current asset of the corporation are not rapidly being converted into the cash
- It has a high amount of the inventory in hand because of the policy of the order fulfillment results making the operating cycle longer
- The corporations borrow much from the financial institutions for paying off their short term obligations, and this makes their profit margin less because of high-interest expense (Westerfield, Ross, & Jordan, 2017)
Characteristics of the firm with the long Cash Cycle
The cycle of the cash depends highly on the receivables, inventory and the payable periods. It is seen that when the cash cycle rises, the level of the inventory and the receivable time also raised. Most of the corporations required the financing for the receivables and the inventories.
The corporation will the longer cycle of cash conversion means that these firms should have to utilize more financing. When a firm has long cash conversion cycle, this shows that this firm is facing trouble in the collection of the receivables and meeting their short-term obligation they take more finance from financial institutions (Ross, Westerfield, & Jordan, 2008, pp. 632-645).
Are stockholders and creditors likely to agree on how much cash a firm should keep on hand? #
No, the creditors of the company want that the firm has a high amount of the cash in hand due to the fact that their likelihood of getting the payment in a timely manner depends highly on the company cash balance. If the company have low cash on hand no matter how well the company is performing in the long-term period, there is no chance the creditors get their payment on time if the company have no cash to pay its short-term obligations.
While the stakeholders take the long-term perspective and they desire that the company invest their cash as effectively and productively as possible. So they don’t want that corporation to keep the cash in hand (Westerfield, Ross, & Jordan, 2017).
Should there be both free trade and the free flow of capital across international borders? Why? #
Yes, the presence of the free trade and the free capital flow across the international boards are essential because of the following reasons. As the Free flow of the trade and the capital across the borders support the occurrence of the trade smoothly. It also brings out the efficiencies and effectiveness in the trade. It is seen that the cost of the goods (CGS) are evaluated by the market with certainly not any of the arbitrage chances. It generates healthy competition that supports in bringing out the best services and the products in the market. The rate of the exchange is considered as the main and efficient determinant.
On the other hand, the developing markets suffer highly because they are not capable or efficient of matching with their counterparts that exist in the developed countries. For protecting their newly developed industries, the companies restrict their capital and trade because without this practice they will not be capable of matching with the developed economies.
Therefore the response of this statement is highly subjective, however in the period of the long path when all of the markets have developed, capital and the trade restrictions will not be exist, and else they will hamper the growth of the economies (Ross, Westerfield, & Jordan, 2008)
Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of Corporate Finance. Tata McGraw-Hill Education.
Westerfield, R., Ross, S., & Jordan, B. (2017). Essentials of Corporate Finance. McGraw-Hill Education.