Soenen Inc. had the following data for 2011 (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?
A) 1,901
B) 2,092
C) 2,301
D) 2,531
E) 2,784

Question

Quizplus · Accepted Answer

The correct answer is A. The increase in pre-tax income is calculated as follows:Increase in net working capital = $1,000 million - $500 million = $500 millionIncrease in cash conversion cycle = 60 days - 45 days = 15 daysInterest savings = $500 million x 8% x 15 days / 365 days = $1,901,369