Problems:
MN Equation
1. Broussard Skateboard's sales are expected to increase by 15% from S8 million in 2013 to S9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013. current liabilities were 51.4 million, consisting of $450,000 of accounts payable, 5500,000 of notes payable, and 5450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.
MN Equation
2. Refer to Problem 1. What would be the additional funds needed if the company's year-end 2013 assets had been S7 million? Assume that all other numbers, including sales, are the same as in Problem 12-1 and that the company is operating at hill capacity. Why is this AFN different from the one you found in Problem 12-1? Is the company's "capital intensity" ratio the same or different?
MN Equation
3. Refer to Problem 1. Return to the assumption that the company had $5 million in assets at the end of 2013, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 12-1?
Sales Increase
4. Maggie's Muffins, Inc., generated 55,000,000 in sales during 2013, and its year-end total assets were 52,500,000. Also, at year-end 2013, current liabilities were 51,000,000. consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2014, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 7%, and its payout ratio will be 80%. How large a sales increase can the company achieve without having to raise funds externally-that is, what is its self-supporting growth rate?
Long-Term Financing Needed
5. At year-end 2013, Wallace Landscaping's total assets were $2.17 million and its accounts payable were 5560.000. Sales, which in 2013 were 53.5 million, are expected to increase by 35% in 2014. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to 5625,000 in 2013. and retained earnings were 5395.000. Wallace has arranged to sell 5195,003 of new common stock in 2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2914. (Because the debt is added at the end of the year. there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends.
a. What were Wallace's total long-term debt and total liabilities in 2013?
b. How much new long-term debt financing will be needed in 2014? (Hint: AFN -New stock = New long-term debt.)
Additional Funds Needed
6. The Booth Company's sales are forecasted to double from $1,000 in 2013 to $2,000 in 2014. Here is the December 31, 2013, balance sheet:
|
Cash
|
$ 100
|
Accounts payable
|
$ 50
|
|
|
200
|
Notes payable
|
150
|
|
Accounts receivable
|
|
Inventories
|
200
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Accruals
|
50
|
|
Net fixed assets
|
500
|
Long-term debt
|
400
|
|
|
|
Common stock
|
100
|
|
|
|
Retained earnings
|
250
|
|
Total assets
|
$1,000
|
Total liabilities and equity
|
$1,000
|
Booth's fixed assets were used to only 50% of capacity during 2013, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 5% and its payout ratio to be 60%. What is Booth's additional funds needed (AFN) for the coming year?
Receivables Investment
7. Snider Industries sells on terms of 2/10, net 45. Total sales for the year are $1,500,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 50 days after their purchases.
a. What is the days sales outstanding?
b. What is the average amount of receivables?
c. What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 45th day?
Effective Cost of Trade Credit
8. The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 90th day, and thereby obtain the needed 5500,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit?
Cash conversion cycle
9. Negus Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days, and a payables deferral period of 25 days. Assume that cost of goods sold is 80% of sales.
a. What is the length of the firm's cash conversion cycle?
b. If Negus's annual sales are 54,380,000 and all sales are on credit, what is the firm's investment in accounts receivable?
c. How many times per year does Negus Enterprises turn over its inventory?
Working Capital Cash Flow Cycle
10. Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were 53,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods sold was 51,800,000. The firm had fixed assets totaling 5535,000. Strickler's payables deferral period is 45 days.
a. Calculate Strickler's cash conversion cycle.
b. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA.
c. Suppose Strickler's managers believe the annual inventory turnover can be raised to 9 times without affecting sales. What would Strickler's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?
Trade Credit
11. The Thompson Corporation projects an increase in sales from $1.5 million to 32 million, but it needs an additional 3300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 2/10, net 30, but it can delay payment for an additional 35 days-paying in 65 days and thus becoming 35 days past due-without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit?