Suppose that last year a firm had a DSO of 35 days and annual revenues equal to

Question

Suppose that last year a firm had a DSO of 35 days and annual revenues equal to 10,000,000$. The treasury department has made it a goal to reduce the DSO to 30 days, while holding constant revenues. If this reduction is realized, then calculate the following:

a. The dollar change in recieviables

b. The implied reduced financing cost of the receivables (Assume a borrowing rate of 2.5%)

c. The change in the OC and CCP given that next year's DIH and DPO are expected to equal 45 days and 75 days, respectively.

Explanation / Answer

DSO= Account receivable / average sale per day

35 = Account receivable / (10000000/365)

Account receivable = 35 x 10000000 / 365

Account receivable = $958904

If DSO = 30

35 = Account receivable / (10000000/365)

Account receivable = 30 x 10000000 / 365

Account receivable = $821918

Change in receivable is $136986 ($958904-$821918)

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