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Business valuations and market efficiency
365
Question 5
Working capital investment
A company has the following expectations for the forthcoming period:
Sales $30m
Materials costs $20m
Other costs $4m
Profit $6m
The following working capital ratios are expected to apply:
Inventory days 45
Receivables days 65
Payables days 35
Calculate the working capital requirement.
Days = SFP figure/SPL figure × 365
SFP figure = Days × SPL figure/365
Inventory = 45 × $20m/365 = $2.47m
Receivables = 65 × $30m/365 = $5.34m
Payables = 35 × $20m/365 = $1.92m
Working capital required = $2.47m + $5.34m – $1.92m = $5.89m
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