Question at position 40 Reducing DSO will:Increase debtIncrease WACCReduce EBITIncrease FCF

Question

BlackTom AI · Accepted Answer

Days Sales Outstanding (DSO) measures how many days, on average, it takes a firm to collect cash after a sale. A lower DSO means receivables are collected faster, reducing accounts receivable and the firm’s net working capital (NWC) requirement.

1. Relevant knowledge points and concepts
- DSO = (Accounts Receivable / Sales) × 365 (or equivalently AR = (Sales/365) × DSO).
- Free Cash Flow (FCF) = EBIT(1 − T) + Depreciation − Capital Expenditures − ΔNWC.
- Changes in DSO affect ΔNWC (through AR) and therefore FCF. DSO changes generally affect timing of cash flows, not operating profit (EBIT) or the firm’s cost of capital (WACC) directly.

2. Step-by-step reasoning
- Reducing DSO → lower average Accounts Receivable.
- Lower AR → smaller increase (or a larger decrease) in NWC (ΔNWC falls).
- In the FCF formula, a smaller ΔNWC increases FCF (since ΔNWC is subtracted).
- No direct effect on EBIT because sales and operating margins are unchanged; only collection timing changes.
- No direct effect on WACC: WACC depends on capital structure and market rates; faster collections might reduce borrowing need over time, but do not directly raise WACC.
- Reducing DSO would not increase debt; if anything, it reduces reliance on external financing.

3. Calculation example (intermediate steps)
Assume annual sales = $1,000,000 and initial DSO = 60 days.
- AR_initial = (1,000,000/365) × 60 ≈ $164,384.
Reduce DSO to 45 days:
- AR_new = (1,000,000/365) × 45 ≈ $123,288.
- ΔAR = 164,384 − 123,288 = $41,096 freed.
This $41,096 reduces ΔNWC and thus increases FCF by approximately $41,096 (ignoring taxes/interest timing).

4. Why the correct answer is correct
Because lowering DSO reduces the capital tied up in receivables, it lowers net working capital needs and therefore increases free cash flow per the FCF formula.

5. Why the other options are incorrect
- Increase debt: incorrect — faster collections reduce the need to borrow, so debt would not increase.
- Increase WACC: incorrect — WACC is driven by market returns and capital structure; a DSO change does not directly raise WACC.
- Reduce EBIT: incorrect — EBIT reflects operating profit; faster collections change timing of cash, not operating margin.

6. Conclusion
Reducing DSO increases FCF, which matches the provided correct answer: "Increase FCF."

Question at position 40 Reducing DSO will:Increase debtIncrease WACCReduce EBITIncrease FCF单项选择题

类似问题

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

The operating cycle is equal to the:

It is typically assumed that total assets (increase/decrease) with increased sales because additional working capital and fixed assets are needed to support growth.

Question at position 57 A firm reduces DSO from 60 days to 40 days while sales remain unchanged. Most direct impact:Decrease in net working capitalIncrease in depreciationDecrease in EBITIncrease in WACC

The working capital formula is Current Assets - Current Liabilities.

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