Project Part 1 Working capital policy 15 Marks

Note: You can choose any company from S&P 500 listed firms except the Disney Corporation.

Choose any listed company of your choice. Make sure that the financial data (Balance Sheet and Income Statement) of that company is available on yahoo finance http://finance.yahoo.com or through financial reports. For purpose of understanding, Lets assume that we have chosen the company British Petroleum BP (Note: Each of you are supposed to choose different company other than BP). You are the Chief Financial Officer (CFO) of BP. 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. She wondered whether BP was managing its working capital effectively and, if not, whether BP could accomplish something similar. How was BP managing its working capital, and how does it compare to its competitors? Upon returning home, you decide to do a quick preliminary investigation using information freely available on the Internet.

1. Obtain BPs financial statements for the past three years from Yahoo! Finance (finance. yahoo.com).

a. Enter the stock symbol (BP) in the box and click Get Quotes.

b. Under Financials, click Income Statement. Copy and paste the statement into Excel (if using Internet Explorer, place the cursor in the statement and right-click the mouse, then choose Export to Microsoft Excel from the menu).

c. Go back to the Web page and under Financials, click Balance Sheet; repeat the download procedure for the balance sheet.

d. Copy and paste the balance sheet so that it is on the same worksheet as the income statement.

2. Obtain the competitors ratios of two firms for comparison from Yahoo! Finance (finance.yahoo.com). For this case we have chosen for instance ExxonMobil Corporation and Chevron Corporation (CVX).

a. Enter ExxonMobil Corporations stock symbol (XOM) in the box at the top and click Get Quotes.

b. Follow the steps in Part 1 to obtain net receivables and inventory from the most recent annual balance sheet, and total revenue and cost of revenue from the most recent annual income statement.

c. Repeat the two steps above for Chevron Corporation (CVX).

3. Compute the cash conversion cycle for BP for each of the last three years.

a. Compute the inventory days using cost of revenue as cost of goods sold and a 365-day year.

b. Compute accounts receivable days using a 365-day year.

c. Compute accounts payable days.

d. Compute the cash conversion cycle for each year.

4. How has BPs CCC changed over the last few years?

5. Compare BPs inventory and receivables turnover ratios for the most recent year to those of its competitors.

a. Compute BPs inventory turnover ratio as cost of revenue/inventory.

b. Compute BPs receivable turnover ratio as total revenue/net receivables.

c. Compute the average inventory turnover ratio and average receivable turnover ratio of Chevron and ExxonMobil. How do BPs numbers compare to the average ratios of its competitors? Do they confirm or refute your answer to Question 4?

6. Determine how BPs cash conversion cycle would change if BPs inventory and accounts receivable balances were adjusted to meet the industry averages.

7. Determine the BPs cash conversion cycle if its inventory and receivables turnover ratios were at the industry average and its payable days were 75 days.

9. What are your impressions regarding BPs working capital management based on this preliminary analysis? Discuss any advantages and disadvantages of bringing the cash conversion cycle more inline with the industry averages.