Case Study: Dell’s Working Capital
Autor: Maryam • December 8, 2017 • 834 Words (4 Pages) • 956 Views
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Fiscal Year
1996
1995
Sales
5296
3475
Net Profits
272
149
Current Liabilities
932
752
1995 Total Assets = 1594 m and Short-Term Investments = 484 m
1996 Total Assets = 2148 m and Short-Term Investments = 591 m
From 1995 to 1996 Dell’s sale increased from 3475 m to 5296 m
Operating Assets in 1995 = (1594 – 484)/3475 = 31.9%
Operating Assets in 1996 = (2148 – 591)/5296 = 29.4%
There was a decrease in Operating Assets of 31.9% - 29.4% = 2.5%
Sales (5296 m - 3475 m) x 31.9 % = $582 m
The decrease in Operating Assets means 5295 x 2.5% = 134.5 m
$582 m is the required amount, $134.5 m is the amount they saved
The additional operating assert required to fund the 52% increase in sales: $582 m - $134.5 m = $447.5 m
Current Liabilities increased 939-$752 = $187 m (1995 to 1996)
$272+$187 = $459 m
Therefore
Net Profit of $459 m greater than $447.5 m. Dell was able to fund its 1996 sales growth through internal resources.
Assume a 50% percent growth rate for Dell’s revenue in 1997. Project its balance sheet.
Year
1996
Percentage
1997
Sales
5296
50%
7944
COGS
4229
50%
6344
Gross Margin
1067
OE
690
50%
1035
Operating Income
377
565
Other Income
6
0
Taxes
111
170
Net Income
272
395
Year
1996 ($ m)
1997 ($ m)
[projected]
Cash
55
55
Short Term Investments
591
591
Accounts Receivables
726
Inventories
429
Others
156
Current Assets:
1957
2645
Accounts Payable
466
835
Other Liability
473
473
Current Liabilities:
939
1308
Difference in operating asset: 2335.5- 1557= 778.5
The increased current liabilities are the resource of fund. From the liabilities, the increased net profit and the current short-term investments we can tell that Dell will be able to fund the growth as long as the short-term investments continue to grow.
How would debt repayment and a repurchased $500 million of common stock affect your recommendation?
Cash Requirement:
Debt repayment: 113
TA-STI=2148-592=1557
Percentage of sale in 1996= 1557/5296=29.4%
Required increased: 0.294 x 0.5 x 5296=778.51
Cash requirement: 500+113+778.51=1391.51
Net Profit margin: 272/5296=5.14%------increased to 6.6%
7944*6.6%=524.3
Shortfall= 1391.51-591-524.3=276.21
Improving cash conversion cycle[5]:
Reducing 8 inventory day: 8*(6344/365)=139
Reducing 7 A/R day: 7*(7944/365)=152.35
Reducing 7 A/P day: 7*(6344/365)=121.66
139+152.35+121.66=413
This result 413 millions is greater than 276.2. That is to say: with the improvement of the cash conversion cycle, Dell is sufficient to fund after paying debt and repurchase stock.
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