CHAPTER 14 15 points

Daniel Barnes, financial manager of New York Fuels (NYF), a heating oil distributor, is concerned about the companys working capital policy. NYFs most recent financial statements and key ratios, plus some industry average data, are given in the following table.

Financial Statements and Other Data on NYF ($ thousands)

A. Balance sheet

Cash and securities $ 100 Accounts payable and accruals $ 300

Accounts receivable 600 Notes payable (8%) 500

Inventories 1,000 Total current liabilities $ 800

Total current assets $1,700 Long-term debt (12%) 600

Net fixed assets 800 Common equity 1,100

Total assets $2,500 Total liabilities and equity $2,500

B. Income statement

Sales $5,000.00

Variable costs (3,700.00)

Fixed costs (1,000.00)

EBIT $ 300.00

Interest ( 112.00)

Earnings before taxes $ 188.00

Taxes (40%) ( 75.20)

Net income $ 112.80

Dividends (30%) $ 33.84

Addition to retained earnings $ 78.96

C. Key ratios

NYF Industry

Profit margin 2.3% 3.0%

Return on equity 10.3% 15.0%

Days sales outstanding (360 days) 43.2 days 30.0 days

Accounts receivable turnover 8.3x 12.0x

Inventory turnover 5.0x 7.5x

Fixed assets turnover 6.3x 6.0x

Total assets turnover 2.0x 2.5x

Debt/Assets 56.0% 50.0%

Times interest earned 2.7x 4.8x

Current ratio 2.1x 2.3x

Quick ratio 0.9x 1.3x

You have been asked to answer the following questions to help determine NYFs working capital policy.

What is the companys inventory conversion period? (2 points)

What is the companys receivables collection period? (2 points)

What is the companys cash conversion cycle, assuming a 29-day payables deferral period? (2 points)

How could the cash conversion cycle concept be used to help improve the firm's working capital management? (3 points)

How does NYFs current working capital policy, as reflected in its financial statements, compare with an average firms policy? (3 points)

Do the differences suggest that NYF's policy is better or worse than that of the average firm in its industry? (3 points)