Soenen Inc. had the following data for 2012 (in millions). The new CFO believes that the company could improve its working capital management sufficiently to bring its net working capital and cash conversion cycle 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?

Question

Quizplus · Accepted Answer

The correct answer is A.The firm's net working capital would have increased by $1,901 million if it had brought its net working capital and cash conversion cycle up to the benchmark companies' level. This would have resulted in a decrease in the firm's bank loan interest expense of $152.1 million (8% x $1,901 million). The firm's pre-tax income would have increased by this amount.