Question

Fontana Painting had the following data for the most recent year (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. Fontana 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
Data Related CCC CCC
Sales $100,000
Cost of goods sold $ 80,000
Inventory (ICP) $ 20,000 91.25 38.00
Receivables (DSO) $ 16,000 58.40 20.00
Payables (PDP) $ 5,000 22.81 30.00
126.84 28.00

a. 1,901
b. 2,092
c. 2,301
d. 2,531
e. 2,784

Answer

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