Question

In: Finance

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

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

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 8 days, based on a 365-day year. He believes he can reduce average receivables by $3.2 million without upsetting customers.

a. By how much must the firm increase its average payable to meet its goal of a 8-day reduction in its cash conversion cycle? (6 points)

b. If XYZ Corporation does decrease its cash conversion cycle by 8 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

here given,

a)

Days Inventory Outstanding = 54 days

Cash Conversion Cycle = Days Inventory Outstanding + Days sales Outstanding - Days Payable outstanding
= 54 + (Accounts Receivable*365/Net Credit sales) - (Accounts Payable*365/COGS)
= 54 + (74*365/ 350) - (63*365/270)
= 54 + 77 - 85
= 46 days

Now, Target Cash conversion cycle = 46-8 = 38 days
Therefore, 38= 54 + 77 - say X
or, X = 54+77-38 = 93
Therefore, average payable must be increased by 63 -(93*270/365 ) = $6 million to reduce cash conversion cycle by 8 days.

b)
Inventory Conversion period = (Inventory*365)/ COGS
or, 54 = (Inventory*365)/ 270
Therefore, Inventory = $40

Now, cash conversion cycle = 38 days
Accounts payable = $69
Accounts Receivable = 74 -3.2= $70.8
Cash = $5
Total Current Assets = 40+70.8+5= 115.8
Total Current Liabilities = 69 (Accounts Payable)
Net Working Capital = Total Current Assets - Total Current Liabilities
= 115.8- 69 = $46.8 million
Earlier Working Capital = (5+74+40)- 63 = $56 million
Change in Net working Capital = $46.8 - $56
= $9.2 million (Decline in Net operating working capital)

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

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...
Below are financials for XYX Corporation (in million $): Sales $330 Cash $    6 Accounts Payable...
Below are financials for XYX Corporation (in million $): Sales $330 Cash $    6 Accounts Payable $   64 COGS 260 Accounts Receivable 72 Long term debt 119 SG&A 12 Inventory 40 Common stock 50 EBIT 58 Net fixed assets 241 Retained earnings 126 Interest 11 Total assets $359 Total Equity & Liab. $359 EBT 47 Tax 14 Net Income $ 33 The firm's inventory conversion period is 56 days. Its new CFO wants to decrease the cash conversion cycle by...
(Cash conversion cycle​) Historical data for the​ firm's sales, accounts​ receivable, inventories, and accounts payable for...
(Cash conversion cycle​) Historical data for the​ firm's sales, accounts​ receivable, inventories, and accounts payable for the Crimson Mfg. Company​ follow: a. Calculate​ Crimson's days of sales​ outstanding, days of payables​ outstanding, and days of sales in inventory for each of the 5 years. ​(Assume a​ 365-day year. Hint​: Assume that the​ firm's cost of goods sold equals​ 70% of​ sales.) What has Crimson accomplished in its atempts to better manage its investments in account receivable and​ inventory? b. Calculate​...
cash collections of accounts receivable will increase ____ and decrease _____ 1) accounts payable , accounts...
cash collections of accounts receivable will increase ____ and decrease _____ 1) accounts payable , accounts receivable 2) accounts receivable, accounts payable 3) cash, accounts receivable 4) cast, accounts payable when developring cost functions , which of the following is false 1) the cost funtion must be believable 2) the cost function does not have to be reliable 3) personal observations of cost and activities provide the best evidence of a plausible relationship between a cost and its cost driver...
Exercise 6         Rao Corporation has the following balance sheet. Cash $   10 Accounts payable $...
Exercise 6         Rao Corporation has the following balance sheet. Cash $   10 Accounts payable $ 20 Short-term investments Accruals 20 Accounts receivable 50 Notes payable     50 Inventory     40    Current liabilities $ 90    Current assets $130 Long-term debt 0 Net fixed assets 100 Common equity 30                               Retained earnings     50 Total assets $230 Total liab. & equity $230 Required: How much net operating working capital does the firm have? How does net working capital affect...
  Cash $ 80 Accounts Payable $ 26   Accounts Receivable 12 Wages and Other Expenses Payable 111...
  Cash $ 80 Accounts Payable $ 26   Accounts Receivable 12 Wages and Other Expenses Payable 111   Inventories 188 Long-Term Debt 203   Other Current Assets 26 Other Long-Term Liabilities 44   Property, Plant, and Equipment 355 Contributed Capital 356   Other Assets 99 Retained Earnings 20 Assume that the following events occurred in the quarter ended December 31 (amounts provided are in whole dollars): Paid $2,000,000 cash for an additional “other asset”. Issued additional shares for $2,000,000 in cash. Purchased property, plant, and...
Hopewell Corporation Balance Sheet As of January 24, 2020 (amounts in thousands) Cash 12,500 Accounts Payable...
Hopewell Corporation Balance Sheet As of January 24, 2020 (amounts in thousands) Cash 12,500 Accounts Payable 2,400 Accounts Receivable 3,600 Debt 3,700 Inventory 5,200 Other Liabilities 3,000 Property Plant & Equipment 16,700 Total Liabilities 9,100 Other Assets 600 Paid-In Capital 5,600 Retained Earnings 23,900 Total Equity 29,500 Total Assets 38,600 Total Liabilities & Equity 38,600 Record the transactions in a journal, transfer the journal entries to T-accounts, compute closing amounts for the T-accounts, and construct a balance sheet to answer...
Hopewell Corporation Balance Sheet As of January 24, 2020 (amounts in thousands) Cash 12,500 Accounts Payable...
Hopewell Corporation Balance Sheet As of January 24, 2020 (amounts in thousands) Cash 12,500 Accounts Payable 2,400 Accounts Receivable 3,600 Debt 3,700 Inventory 5,200 Other Liabilities 3,000 Property Plant & Equipment 16,700 Total Liabilities 9,100 Other Assets 600 Paid-In Capital 5,600 Retained Earnings 23,900 Total Equity 29,500 Total Assets 38,600 Total Liabilities & Equity 38,600 Record the transactions in a journal, transfer the journal entries to T-accounts, compute closing amounts for the T-accounts, and construct a balance sheet to answer...
Hopewell Corporation Balance Sheet As of January 24, 2020 (amounts in thousands) Cash 12,500 Accounts Payable...
Hopewell Corporation Balance Sheet As of January 24, 2020 (amounts in thousands) Cash 12,500 Accounts Payable 2,400 Accounts Receivable 3,600 Debt 3,700 Inventory 5,200 Other Liabilities 3,000 Property Plant & Equipment 16,700 Total Liabilities 9,100 Other Assets 600 Paid-In Capital 5,600 Retained Earnings 23,900 Total Equity 29,500 Total Assets 38,600 Total Liabilities & Equity 38,600 Record the transactions in a journal, transfer the journal entries to T-accounts, compute closing amounts for the T-accounts, and construct a balance sheet to answer...
Hopewell Corporation Balance Sheet As of March 11, 2020 (amounts in thousands) Cash 12,500 Accounts Payable...
Hopewell Corporation Balance Sheet As of March 11, 2020 (amounts in thousands) Cash 12,500 Accounts Payable 2,400 Accounts Receivable 3,600 Debt 3,700 Inventory 5,200 Other Liabilities 3,000 Property Plant & Equipment 16,700 Total Liabilities 9,100 Other Assets 600 Paid-In Capital 5,600 Retained Earnings 23,900 Total Equity 29,500 Total Assets 38,600 Total Liabilities & Equity 38,600 Use T-accounts to record the transactions below, which occur on March 12, 2020, close the T-accounts, and construct a balance sheet to answer the question....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT