Question

In: Finance

Below are financials for XYX Corporation (in millions $): Sales $350 Cash $    5 Accounts Payable...

Below are financials for XYX Corporation (in millions $):

Sales

$350

Cash

$    5

Accounts Payable

$   63

COGS

270

Accounts Receivable

74

Long term debt

125

SG&A

10

Inventory

40

Common stock

50

EBIT

70

Net fixed assets

239

Retained earnings

120

Interest

10

Total assets

$358

Total Equity & Liab.

$358

EBT

60

Tax

18

Net Income

$ 48

The firm's inventory conversion period is 54 days. Its new CFO wants to decrease the cash conversion cycle by 7 days, based on a 365-day year. He believes he can reduce average receivables by $2.9 million without upsetting customers.

  1. By how much must the firm increase its average payable to meet its goal of a 7-day reduction in its cash conversion cycle? (6 points)
  1. If XYZ Corporation does decrease its cash conversion cycle by 7 days by increasing average payables and reducing average receivables, what will be the change in its net operating working capital? The company's inventory remains constant. (2 points)

Solutions

Expert Solution

a.

Current days of payables = 365 x Accounts payable / cost of goods sold = 365 x 63 / 270 = 85.17

Current days of receivables = 365 x accounts receivables / sales = 365 x 74 / 350 = 77.17

New days of receivables after reducing receivables by 2.9 million = 365 x (74 - 2.9) / 350 = 74.15

Let A be the new days of payables

Cash conversion cycle = days of inventory + days of receivables - days of payables

Current cash conversion cycle = 54 + 77.1 - 85.17 = 45.93

New cash conversion cycle = current cash conversion cycle - 7 = 45.93 - 7 = 38.93 = 54 + 74.15 - A

A = 54 + 74.15 - 38.93 = 89.22

365 x new accounts payable / 270 = 89.22

New Accounts payable = 89.22 x 270 / 365 = 66

Change in accounts payable = 66 - 63 = 3

The firm must increase accounts payable by $3 million

b.

Operating working capital = net operating current assets - net operating current liabilities

Current operating working capital = (Inventories + accounts receivables + cash) - accounts payable = (40 + 74 + 5) - 63 = $56

New operating working capital = (40 + 71.1 + 5) - 66 = $50.1

Change in operating working capital = 56 - 50.1 = $5.9 million

jeff jeffy answered 3 years ago
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