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fm14 19 - 8.33 11.00 Inventory/Sales 12.0 9.09 SGA/Sales...

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Mini Case: 14 - 19 i. Based on comparisons between SEC's days sales outstanding (DSO) and inventory turnover ratios with the industry average figures, does it appear that SEC is operating efficiently with respect to its inventory and accounts receivable? Suppose SEC was able to bring these ratios into line with the industry averages and reduce its SGA/sales ratio to 33%. What effect would this have on its AFN and its financial ratios? What effect would this have on free cash flow and ROIC? Answer: The DSO and inventory turnover ratio indicate that SEC has excessive inventories and receivables. The effect of improvements here would reduce asset requirements and AFN. See the results below based on the spreadsheet FM12 Ch 14 Mini Case.xls . Inputs Before After DSO 43.20 32.01 Accounts Receivable/Sales 12.0% 8.77% Inventory Turnover
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Unformatted text preview: 8.33 11.00 Inventory/Sales 12.0% 9.09% SGA/Sales 35.0% 33.0% Outputs AFN $187.2 $15.7 FCF -$150.0 $33.5 ROIC 6.7% 10.8% ROE 8.5% 12.3% j. Suppose you now learn that SEC’s 2007 receivables and inventories were in line with required levels, given the firm’s credit and inventory policies, but that excess capacity existed with regard to fixed assets. Specifically, fixed assets were operated at only 75 percent of capacity. j. 1. What level of sales could have existed in 2007 with the available fixed assets? Answer: Full Capacity Sales = operated were assets fixed at which capacity of % sales Actual = 75 . 000 , 2 $ = $2,667. Since the firm started with excess fixed asset capacity, it will not have to add as much fixed assets during 2008 as was originally forecasted....
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