Â J.C. PENNEY COMPANY Case Solution
Â Â Â Â Â Â Â Â Â Â Â Lastly, the cash to debt ratio has also been computed for all the last eight quarters. This ratio shows the ability of the company to repay the outstanding debt from its generated operating cash flows. First of all, if we analyze the trend for this ratio, then it could be seen that this ratio has also been mostly observed to decline in the last eight quarters but it is fluctuating. However, on average this ratio has fallen significantly as compared to the last year. For example, the cash to debt ratio in the first quarter of 2011 was 23% and in the fourth quarter of 2012 this ratio is 14% only. Overall, all the leverage ratios for the company show that despite the low level of debt held by the company, it is facing issues to repay the debt principle and interest also due to cash drainage.
Â Â Â Â Â Â Â Â Â Â Â In order to assess and evaluate the position of the working capital accounts for JC Penney, certain working capital ratios have been computed for the company as shown in the appendix. First of all, the days sales outstanding ratios have been calculated, which shows the average number of the days in which the company repays its traders and suppliers. The number of these days has been always high, which is a positive thing for managing working capital within a company. By stretching the payables, the company is improving its cash flow situation.
Â Â Â Â Â Â Â Â Â Â Â Secondly, if we look at the days sales inventories ratio, then this ratio is nevertheless high, however it had been fluctuating which shows that this could provide the company an opportunity to improve its cash flow position by simply reducing its overall inventory level which in turn would reduce the holding and storage costs for the company. Finally, the receivables days ratio has also been computed which is quite impressive as it is highly low. This shows that the company is receiving its outstanding receivables from its customers on time.
Â Â Â Â Â Â Â Â Â Â Â The cash conversion cycle has also been computed, which has also been declined over the last eight quarters. The cash conversion cycle of 13 days in the fourth quarter of the year 2012 shows that the performance of the company in managing working capital is high. Similarly, the working capital over sales ratio also shows that the working capital requirement to support the current level of sales for the company has been declining therefore, this shows that the management of the company is already squeezing cash from these accounts. Nevertheless, there is still opportunity for the company to squeeze more cash from working capital accounts by reducing the level of the inventories and stretching the days of payables.
Assume JCP will experience a $1.5 billion net income loss for 2013 and that a cash balance of $1.0 billion is required for JCP to operate efficiently. Create a pro forma sources and uses statement to estimate JCPâ€™s external funding required by end of year 2013. Recommend whether debt or equity issuance is the better choice as the source for external funding.
Â Â Â Â Â Â Â Â Â Â Â The Pro forma sources and uses statement has been formulated as shown in the excel spreadsheet. In order to formulate this statement, it has been assumed that depreciation expense, increase/decrease in assets, liabilities and working capital, capital expenditures, stock compensation and retirement of debt and equity would remain at the same level as between the year 2011 and 2012. The reason for this is that the pro forma financial statements have not been provided in the case………….
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