# What is the difference between spot rates and forward rates?

October 12, 2019
###### Emerging Threats & Countermeas
October 12, 2019

What is the difference between spot rates and forward rates?

Part 1: Working Capital Management (1500 words)

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?

Part 3: International Financial Management

Citrus, Inc. is a medium-sized producer of citrus juice drinks in Florida. Until now, the company has confined its operations and sales to the United States, but its CEO, Heidi Sims, wants to expand into Europe. The first step would be to set up sales subsidiaries in Spain and Sweden, then to set up a production plant in Spain, and, finally, to distribute the product throughout the European Union. The firm’s financial manager, George Benson, is enthusiastic about the plan, but he is worried about the implications of the foreign expansion on the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of director’s meeting. To get you started, Benson has supplied you with the following list of questions.

A. What is a multinational corporation? Why do firms expand into other countries?

B. Discuss at least six major factors which distinguish multinational financial management from financial management as practiced by a purely domestic firm. (Please consider doing additional research on this question and document your findings).

C. Discuss exchange rate risk as they relate to multinational corporations.

D. Describe the current International Monetary System. How does the current system differ from the system that was in place prior to August 1971? (Please consider doing additional research on this question and document your findings).

E. What is the difference between spot rates and forward rates? When is the forward rate at a premium to the spot rate? At a discount? (Please consider doing additional research on this question and document your findings).

F. From a managerial point of view, discuss how your responses above will help Citrus, Inc. as they plan to expand overseas.