Question

1. The Company Colorín Colorado SA maintains 60 days of accounts receivable, 20 days of inventory and 30 days of accounts payable to suppliers of goods and services (accounts pay totals). Its Gross Margin is 30% and its EBITDA Margin is 14%. With this information, answer the following questions: to. What should be the target PKT indicator for this company? b. If next year's sales will grow by $2 billion, how much capital Will the company require additional work? c. How should this increase in KTNO be financed?

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Answer to a math question 1. The Company Colorín Colorado SA maintains 60 days of accounts receivable, 20 days of inventory and 30 days of accounts payable to suppliers of goods and services (accounts pay totals). Its Gross Margin is 30% and its EBITDA Margin is 14%. With this information, answer the following questions: to. What should be the target PKT indicator for this company? b. If next year's sales will grow by $2 billion, how much capital Will the company require additional work? c. How should this increase in KTNO be financed?

Expert avatar
Miles
4.9
107 Answers
Let's address the questions based on the financial data and operational parameters provided for Colorín Colorado SA:

### a. What should be the target PKT indicator for this company?

**PKT (Payment, Collection, and Inventory Turnover Days)**, also known as the Cash Conversion Cycle (CCC), measures the time in days between paying suppliers and receiving cash from customers. It is calculated as:

\text{PKT (CCC)} = \text{Days of Accounts Receivable} + \text{Days of Inventory} - \text{Days of Accounts Payable}

Given:
- Days of Accounts Receivable = 60 days
- Days of Inventory = 20 days
- Days of Accounts Payable = 30 days

\text{PKT (CCC)} = 60 + 20 - 30 = 50 \, \text{days}

The target PKT or CCC for Colorín Colorado SA should be 50 days.

### b. If next year's sales will grow by $2 billion, how much capital will the company require additionally?

The Net Working Capital (NWC) needs associated with sales growth can be estimated based on the operating cycle components and the increase in sales. We first need to calculate the daily sales rate, then use it to find the incremental working capital needed.

\text{Daily Sales Rate} = \frac{\text{Current Sales}}{365}
\text{Incremental Working Capital} = \text{Daily Sales Rate} \times \text{PKT (CCC)}

Assuming the current annual sales are S and they increase by $2 billion:

1. Calculate the daily sales increase:
\text{Daily Sales Increase} = \frac{2,000,000,000}{365} \approx 5,479,452

2. Multiply by the CCC to find additional working capital needed:
\text{Incremental Working Capital} = 5,479,452 \times 50 = 273,972,600

Therefore, the company would need approximately $274 million additional working capital.

### c. How should this increase in KTNO be financed?

This increase in Net Operating Working Capital (KTNO) can be financed through a combination of the following sources, based on the company’s financial strategy, cost of capital, and access to funding:

1. **Internal Cash Flows:** If the company generates sufficient cash flows from its operations, it could reinvest part of these earnings back into the business.

2. **Short-term Borrowings:** This could include lines of credit or short-term loans, which are often used to manage working capital needs.

3. **Long-term Debt:** Depending on the company's debt capacity and cost considerations, issuing long-term debt could provide a stable financing source.

4. **Equity Financing:** Although typically more costly in terms of dilution and potentially higher cost of capital, issuing new shares could be considered if the debt capacity is limited or if maintaining a balanced capital structure is crucial.

5. **Trade Credit:** Negotiating better terms with suppliers could reduce the need for external financing by effectively increasing days of accounts payable, hence reducing the CCC.

Deciding on the best mix of these options will depend on the company's overall financial strategy, existing capital structure, market conditions, and the relative cost of each type of financing.

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