Working capital comprehensive problem set: I.Consider the following data for Salesalot Inc. : Year 2014 2015 Income statement data (in $millions): Sales 900 1000 COGS 720 800 … Interest expense...

Working capital comprehensive problem set:
1. Consider the following data for Salesalot Inc.:
    Year
    2014
    2015
    Income statement data (in $ millions):
     
     
    Sales
    $900
    $1,000
    COGS
    $720
    $800
    Interest expense
    $30
    $40
    Net Income
    $90
    $100
     
     
     
    Other info:
     
     
    Purchases
     
    $820
    Tax rate
     
    $0
     
     
     
    Balance sheet data (in $millions):
     
     
    Receivables
    $220
    $300
    Inventory
    $100
    $120
    Total Assets
    $1,000
    $1,100
    Accounts Payable
    $250
    $180
    Total Stockholders' Equity
    $350
    $400
Question-1
Calculate DSO, DIO and the OperatingCycle for 2015.
Solution-
DSO = (Accounts receivable / Sales)*365 days
DSO = ($300/$1,000)*365 days
DSO = 110 days
DIO = (Average inventory / Cost of sales)*365 days
DIO = ((($100 + $120)/2)/$800)*365 days
DIO = 50 days
Operating Cycle = DSO + DIO
Operating Cycle = 110 days + 50 days
Operating Cycle = 160 days
Question-2
Calculate DPO and the Cash Conversion Cycle for 2015.
Solution-
DPO = (Accounts Payable / (Cost of Sales / 365 days))
DPO = ($180 / ($800 / 365))
DPO = 82 days
Cash Conversion Cycle = DIO + DSO – DPO
Cash Conversion Cycle = 50 days + 110 days – 82 days
Cash Conversion Cycle = 78 days
Question-3
Calculate Total Assets Turnover and ROA using unlevered Income for 2015.
Solution-
Total Assets Turnover = Net Sales / Average Total Assets
Total Assets Turnover = $1,000 / (($1,100 + $1,000)/2)
Total Assets Turnover = 0.95 times
ROA = Net Income / Average Total Assets
ROA = $100 / (($1,100 + $1,000)/2)
ROA = 0.10 times
Question-4
Calculate ROE (use the DuPont equation) for 2015.
Solution-
ROE (use the DuPont equation) = Profit Margin* Total Assets Turnover* ROA
ROE (use the DuPont equation) = ($100/$1000)*0.95*0.10
ROE (use the DuPont equation) = 0.95%
The firm is looking to expand sales and is considering relaxing its credit sales policy in 2016. These changes are expected to decrease receivables turnover by 20% from the 2015 level.Also, the company is implementing new supply chain system to improve inventory management, which will help increase inventory turnover by 20% from the 2015 level.
Question-5
How will the above changes impact the firm’s Operating Cycle in 2016? Will it increase or decrease and by how much?
Solution-
Accounts Receivable 2015 (Decrease) = $300 – ($300*20%)
Accounts Receivable 2015 (Decrease) = $240
DSO = (Accounts receivable / Sales)*365 days
DSO = ($240/$1,000)*365 days
DSO = 88 days
Inventory 2015 (Increase) = $120 + ($120*20%)
Inventory 2015 (Increase) = $144
DIO = (Average inventory / Cost of sales)*365 days
DIO = ((($100 + $144)/2)/$800)*365 days
DIO = 56 days
Operating Cycle = DSO + DIO
Operating Cycle = 88 days + 56 days
Operating Cycle = 144 days
As per the above calculation the Operating Cycle of 2015 is decreased by 16 days (160 days – 144 days).
Question-6
If in 2016, the company wants to keep the same level of Cash Conversion Cycle as in 2015, by how much the DPO will needs to increase or decrease?
Solution-
If company wants same Cash Conversion Cycle as in 2015 the DPO will increase to 16 days.
Consider scenario where all Income statement and balancesheet dataremains the same in 2016 as it was in 2015 except for Receivables, Inventory, Accounts Payable, Stockholders Equity and Total Assets. Consider the following data for 2016:
Receivables = $350M
Inventory = $63.3M
Accounts Payable = $319M
Question-7
Calculate Stockholders Equity and Total Assets for 2016.
Solution-
Stockholders’ Equity (2016) = $400
Total Assets (2016) = Receivables + Inventory
Total Assets (2016) = $350 + $63.3
Total Assets (2016) = $413.3 million
Question-8
Calculate the firm’s Cash Conversion Cycle for 2016.
Solution-
Cash Conversion Cycle = DIO + DSO – DPO
Cash Conversion Cycle = ((Average inventory / Cost of sales)*365 days) + ((Accounts receivable / Sales)*365 days) – (Accounts Payable / (Cost of Sales / 365 days)
Cash Conversion Cycle = ((($120 +...