Calculate the firms current-quick-times interest earned


Assignment:

1. Anderson's bank requires a compensating balance of $3 million. How much additional funds can be freed up for investment in fixed assets if the firm reduces its cash balance to the minimum required by the bank?

2. How much additional financing can be obtained from receivables if Anderson institutes more stringent credit and collection policies and is able to reduce its average collection period to the industry average? (Assume that credit sales remain constant at $75 million.)

3. How much additional financing can be obtained for fixed-asset expansion if Anderson is able to increase its inventory turnover ratio to the industry average through tighter control of its raw materials, work-in-process, and finished goods inventories? (Assume that the cost of sales remains constant at $60.75 million.)

4. Anderson's suppliers extend credit to the firm on terms of?onet 30.?? Anderson normally pays its bills on the last day of the credit period. How much additional financing could be generated if Anderson were to stretch its payables 10 days beyond the due date?

5. Prepare a pro forma balance sheet (dollars and percentages) as of December 31, 2004, assuming that Anderson has instituted all actions described in questions 1, 2, 3, and 4, and that the funds generated have been used to build a new plant. (Assume that long-term debt and stockholders' equity at the end of 2004 remain the same as at the end of 2003.

In other words, no new long-term debt is issued or old long-term debt retired, and all net income after taxes is paid out in common stock dividends. Also assume that net fixed assets, except for the new plant, remain unchanged during 2004. Finally assume that notes payable remain unchanged during 2004.)

6. Prepare a pro forma income statement for 2004. Assume that sales increase to $87 million as a result of the plant expansion. Also assume that the cost of sales and selling and administrative expense ratios (as a percentage of sales) remain constant. Finally, assume that interest expense and the firm's tax rate remain the same in 2004.

7. Calculate the firm's current, quick, times interest earned, and rate of return on equity ratios based on the pro forma statements determined in questions 5 and 6. How do these ratios compare with the actual values for 2003 and the industry averages?

8. What considerations might lead Anderson and White to disagree about the desirability of using short-term sources of funds to finance the plant expansion?

9. What other sources of short-term funds might the firm consider using to finance the plant expansion?

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Finance Basics: Calculate the firms current-quick-times interest earned
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