1. Working Capital Management. Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.
3. Sources and Uses of Cash. State how each of the following events would affect the firm’s balance sheet. State whether each change is a source or use of cash.
a. An automobile manufacturer increases production in response to a forecast increase in demand. Unfortunately, the demand does not increase.
b. Competition forces the firm to give customers more time to pay for their purchases.
c. The firm sells a parcel of land for $100,000. The land was purchased 5 years earlier for $200,000.
d. The firm repurchases its own common stock.
e. The firm pays its quarterly dividend.
f. The firm issues $1 million of long-term debt and uses the proceeds to repay a short-term bank loan.
5. Managing Working Capital. A new computer system allows your firm to more accurately monitor inventory and anticipate future inventory shortfalls. As a result, the firm feels more able to pare down its inventory levels. What effect will the new system have on working capital and on the cash conversion cycle?
