NEW MyLab Finance with Pearson eText -- Access Card -- for Fundamentals of Corporate Finance
NEW MyLab Finance with Pearson eText -- Access Card -- for Fundamentals of Corporate Finance
3rd Edition
ISBN: 9780133543889
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
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Chapter 19, Problem 15P

Use the financial statements supplied below and on the next page for International Motor Corporation (IMC) to answer the following questions (see MyFinanceLab for the data in Excel format):

a. Calculate the cash conversion cycle for IMC for both 2015 and 2016. What change has occurred, if any? All else being equal, how does this change affect IMC’s need for cash?
b. IMC’s suppliers offer terms of net 30. Doest it appear that IMC is doing a good job of managing its accounts payable?

International Motor Corporation

Income Statement (in millions)

For the Years Ending December 31

    2015 2016
    Sales $60,000 $75,000
    Cost of goods sold 52,000 61,000
    Gross profit $8,000 $14,000
    Selling, general and administrative expenses 6,000 8,000
    Operating profit $2,000 $6,000
    Interest expense 1,400 1,300
    Earnings before taxes $600 $4,700
    Taxes 300 2350
    Earnings after taxes $300 $2,350

International Motor Corporation

Balance Sheet (in millions) as of December 31

    2015 2016 2015 2016
    Assets Liabilities
    Cash $3,080 $6,100 Accounts payable $3,600 $4,600
    Accounts receivable 2,800 6,900 Notes payable 1,180 1,250
    Inventory 6,200 6,600 Accruals 5,600 6,211
    Total current assets $12,080 $19,600 Total current liabilities $10,380 $12,061
    Net plant, property, and equipment $23,087 $20,098 Long-term debt $6,500 $7,000
    Total liabilities $16,880 $19,061
    Total assets $35,167 $39,698 Equity
    Common Stock $2,735 $2,735
    Retained Earnings $15,552 $17,902
    Total Equity $18,287 $20,637
    Total liabilities and equity $35,167 $39,698

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