Soenen Inc. had the following data for 2008 (in millions). The new CFO believes that the company could improve its working capital management sufficiently to bring its NWC and CCC 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 firm's pre-tax income would have increased by $1,901 million if the changes had been made. This is because the firm would have been able to reduce its interest expense by $152 million (8% x $1,901 million) and its CCC by $1,749 million.