Chapter 19 #4DC Fundamentals of Corporate Finance 4th edition Berk/DeMarzo/Harford

You are the Chief Financial Officer of Walmart. This afternoon you played golf with a member of the companys board of directors. Somewhere during the back nine, the board member enthusiastically described a recent article she had read in a leading management journal. This article noted several companies that had improved their stock price performance through effective working capital management, and the board member was intrigued. Even though Walmart was known for working capital management, she wondered if it could do even better. How was Walmart managing its working capital, and how does it compare to Costco, another company well known for working capital management? Upon returning home, you decide to do a quick preliminary investigation using information freely available on the Internet.

#3 Compute the cash conversion cycle for Walmart and Costco for each of the last four years.

1. Compute the inventory days using Cost of Revenue as cost of goods sold and a 365-day year.
2. Compute accounts receivable days using a 365- day year.
3. Compute accounts payable days using a 365- day year
4. Compute the cash conversion cycle for each year.

#4 How has Walmarts CCC changed over the last few years?

#5 Compare Walmarts inventory and receivables turnover ratios for the most recent year to Costcos.

1. Compute the inventory turnover ratio as cost of revenue/inventory.
2. Compute the receivable turnover ratio as total revenue/net receivables.

#6 Now assume Walmart matches Costcos inventory and receivables turnover ratios without changing its payable days.

1. How much would Walmarts free-cash flow change relative to its current situation?
2. What would Walmarts CCC be in this case?

#7 What are your impressions regarding Walmarts working capital management based on this preliminary analysis? Discuss any advantages and disadvantages of attempting to match Costcos cash conversion cycle.