Company x sells on a 115 net 90 basis customer y buys goods

Question

Part I-

Q1. Company X sells on a 1/15, net 90, basis. Customer Y buys goods with an invoice of $3,000.

a. How much can company Y deduct from the bill if it pays on day 15?

b. How many extra days of credit can company Y receive if it passes up the cash discount?

c. What is the effective annual rate of interest if Y pays on the due date rather than day 15? (Use 365 days in a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Q2. Microbiotics currently sells all of its frozen dinners cash on delivery but believes it can increase sales by offering supermarkets 1 month of free credit. The price per carton is $160, and the cost per carton is $95. The unit sales will increase from 1,110 cartons to 1,170 per month if credit is granted. Assume all customers pay their bills and take full advantage of any credit period offered.

a. If the interest rate is 1% per month, what will be the change in the firm's total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If the interest rate is 1.5% per month, what will be the change in the firm's total monthly profits on a present value basis if credit is offered to all customers? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. Assume the interest rate is 1.5% per month but the firm can offer the credit only as a special deal to new customers, while existing customers will continue to pay cash on delivery. What will be the change in the firm's total monthly profits on a present value basis under these conditions? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Q3. On each nondelinquent sale Cast Iron receives revenues with a present value of $1,270 and incurs costs with a present value of $1,120. Assume there is no possibility of repeat orders and that the probability of successful collection from the customer is p = .96.

a­1. What is the expected profit of granting credit? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

a­2. Should Cast Iron grant or refuse credit?

• Grant
• Refuse

b. What is the break­even probability of collection? (Enter your answer as a percent rounded to 1 decimal place.)

Q4.Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock­box system. She forecasts that 500 payments a day will be made to lock boxes with an average payment size of $2,500. The bank's charge for operating the lock boxes is $.30 a check. The interest rate is .011% per day.

a­1. If  the  lock  box makes  the  cash  available  2  days  earlier,  calculate  the  net  daily  advantage  of  the system. (Do not round intermediate calculations.)

a­2. Is it worthwhile to adopt the system?

• Yes
• No

b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock­box system? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Part II-

Q1.

Income statement data:
Sales	$6,000
Cost of goods sold	5,200
Balance sheet data:
Inventory	$590
Accounts receivable	210
Accounts payable	370

Calculate the accounts receivable period, accounts payable period, inventory period, and cash conversion cycle for the above firm: (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 1 decimal place.)

Q2. Complete the statement of sources and uses of cash from the following entries:

Net income	$2,300
Dividends	600
Additions to inventory	200
Additions to receivables	230
Depreciation	170
Reduction in payables	630
Net issuance of long-term debt	380
Sale of fixed assets	140

Q3. Here is a forecast of sales by National Bromide for the first 4 months of 2015 (figures in thousands of dollars):

Month:	1	2	3	4
Cash sales	34	43	37	33
Credit sales	195	215	185	165

On average, 60% of credit sales are paid for in the current month, 20% in the next month, and the remainder in the month after that. What are the expected cash collections in months 3 and 4? (Enter your answers in whole dollars.) 

Q4. A firm sells its $1,070,000 receivables to a factor for $1,016,500. The average collection period is 1 month. What is the effective annual rate on this arrangement? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Part III-

Q1. The following is the financial statement of Executive Fruit Company for the year ended December 2014.

INCOME STATEMENT, 2014 (Figures in $ Thousands)
Revenue	$10,500
Cost of goods sold	9,450
EBIT	$ 1,050
Interest	210
Earnings before taxes	$     840
State and federal tax	336
Net income	$     504
Dividends	336
Additions to retained earnings	$     168

 

BALANCE SHEET (Year-End, 2014) (Figures in $ Thousands)
Assets
Net working capital	$1,050
Fixed assets	4,200
Total assets	$5,250
Liabilities and shareholders' equity
Long-­term debt	$2,100
Shareholders' equity	3,150
Total liabilities and shareholders' equity	$5,250

The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. 

First stage pro forma statements:

PRO FORMA INCOME STATEMENT, 2015 (Figures in $ Thousands)
Revenue	$11,550
Cost of goods sold	10,395
EBIT	$ 1,155
Interest	210
Earnings before taxes	$     945
State and federal tax	378
Net income	$     567
Dividends	378
Additions to retained earnings	$189

Second stage pro forma balance sheet:

PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands)
Assets
Net working capital	$1,155
Fixed assets	4,620
Total assets	$5,775
Liabilities and shareholders' equity
Long-­term debt	$2,436
Shareholders' equity	3,339
Total liabilities and shareholders' equity	$5,775

How would Executive Fruit's financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)

Dividends fall by $________. Therefore, the requirement for external financing falls from $_____ to $_____. On the other hand, shareholders' equity will be increased by $_____________.

Q2. Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 2.00; profit margin = 4%; payout ratio = 35%; equity/assets = .30. (Do not round Intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Q3. Executive Fruit's  financial manager  believes  that  sales  in  2015  could  rise  by  as much  as 20%  or  by  as little as 10%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs. 

a. Recalculate  the  first stage  pro  forma  financial  statements  under  these  two  growth  assumptions  and calculate  the  required  external  financing  (All  figures  are  in  thousands).  (Enter your answers in thousands.)

b. Assume any required external funds will be raised by issuing long term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second stage) pro forma balance sheet. (Enter your answers in thousands.)

Q4. Plank's Plants had net income of $9,000 on sales of $80,000 last year. The firm paid a dividend of $1,800. Total assets were $400,000, of which $160,000 was financed by debt. 

a. What is the firm's sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

b. If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.)

c. What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Q5. An all­equity­financed firm plans to grow at an annual rate of at least 20%. Its return on equity is 32%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)  

Q6. The 2015 financial statements for Growth Industries are presented below:

INCOME STATEMENT, 2015
Sales	$210,000
Costs	155,000
EBIT	$55,000
Interest expense	11,000
Taxable income	$44,000
Taxes (at 35%)	15,400
Net income	$28,600
Dividends	$14,300
Addition to retained earnings	14,300

 

BALANCE SHEET, YEAR­END, 2015
Assets		Liabilities
Current assets		Current liabilities
Cash	$4,000	Accounts payable	$11,000
Accounts receivable	9,000	Total current liabilities	$11,000
Inventories	27,000	Long­term debt	110,000
Total current assets	$40,000	Stockholders' equity	15,000
Net plant and equipment	150,000	Common stock plus additional paid­in capital Retained earnings	54,000
Total assets	$190,000	Total liabilities and stockholders' equity	$190,000

Sales and costs in 2016 are projected to be 20% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .50. 

What is the required external financing over the next year?