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Calculate the target quick ratio

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Question - DCC Plc, a multinational company, has annual credit sales of $5.4 million and related cost of sales are $2.16 million. Financial information relating to DCC Plc is as follows:

 

$'000

$'000

Inventory 

473.4

Trade Receivables 

1,331.5

1,804.9

Trade Payables 

177.5

Overdraft 

1,326.6

1,504.1

 

Net working capital

300.8

For the financial year of 2023, DCC Plc expects a fall in the cost of sales which would decline to 60% of sales, meanwhile the credit sales would have no change. DCC Plc plans to change working capital policy in order to improve its profitability. 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

Current ratio: 1.3 times

Required -

1. Calculate the working capital cycle of DCC Plc and comment on your findings.

2. Calculate the target quick ratio (acid test ratio) and the target ratio of sales to net working capital of DCC Plc at the end of March 2023.

3. Compare the current net working capital with the expected one in 2023 and comment on how the working capital policy would have changed.

Reference no: EM133138648

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