Soenen Inc. had the following data for 2008 (in millions). The new CFO believes

Question

Soenen Inc. had the following data for 2008 (in millions). The new CFO believes that the company could improve its working capital management sufficiently to bring its NWC and CCC up to the benchmark companies' level without affecting either sales or the costs of goods sold. Soenen finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a 365-day year. If these changes had been made, by how much would the firm's pre-tax income have increased?
Original Benchmark CCC
Data Related CCC -
Sales: 100,000
Cost of Goods Sold: 80,000
Inventory (ICP) 80,000 91.25 38
Receivables (DSO) 16,000 58.40 20
Payables (PDP) 5,000 22.81 30

a. 1,901
b. 2,092
c. 2,301
d. 2,531

Explanation / Answer

b. 2,092 Reason: Increase in working capital will lead to increase in carrying cost of the company @ 8% p.a. thus as the net working capital of the company increases to 91000 the carrying cost of the company will increase by 91000 *8% = 7280

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