ABC is an electronic manufacturing company based in Singapore. It sells a wide rangeof products to markets
Question:
ABC is an electronic manufacturing company based in Singapore. It sells a wide rangeof products to markets in the Asian region. Currently, it has a sizeable IT division withthe following characteristics: value of computers and hardware of $20 million andannual IT operating cost of $2 million. The average life span of the computers andhardware is 5 years. You have analyzed the IT needs of ABC and felt that a outsourcingcontract can meet ABC's IT needs for $5.5 million p.a. You also noticed that thecompany is not very efficient in its management of inventories and accounts receivable.
You are of the view that if ABC can reduce its inventory days by 5 to 40 and accountsreceivables by 10 to 90. With a bond rating of BBB, ABC is charged Prime + 4% forloans taken to finance its purchase of computers and hardware. IBM on the other handhas a AAA bond rating and commands a finance cost of Prime + 0.5%. Other details ofABC's financials are:
Cost of equity= 14%; Prime rate = 5%; tax rate is 20%, Debt ratio = 0.4
Sales = $500 million; Cost of goods sold = $400.
How can ABC to create value for shareholders? How much value is created?
Managerial Accounting
ISBN: 978-0697789938
13th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer