Spring Co a multinational company, has annual credit sales of $5·4 million and related cost of sales are $2·16 million. Approximately half of all credit sales are exports to a European country, which are invoiced in euros. Financial
information relating to Spring Co is as follows:

Spring Co plans to change working capital policy in order to improve its profitability. This policy change will not affect the current levels of credit sales, cost of sales or net working capital. As a result of the policy change, the following working capital ratio values are expected:

Inventory days 50 days
Trade receivables days 62 days
Trade payables days 45 days

Required:
(a) For the change in working capital policy, calculate the change in the operating cycle, the effect on the current ratio and the finance cost saving. Comment on your findings

(b) Elaborate on the three motives for firms to maintain working capital balances.
 

Transcribed Image Text:

$00 $000 Inventory Trade Receivables Trade Payables Overdraft 473.4 1331.5 1804.9 177.5 1326.6 1504.1 Net Working Capital 300.8 $00 $000 Inventory Trade Receivables Trade Payables Overdraft 473.4 1331.5 1804.9 177.5 1326.6 1504.1 Net Working Capital 300.8

Answer rating: 100% (QA)

Solution a i The current operating cycle is the sum of the current inventory days and trade receivab... View the full answer