Question 1. Percentage of Sales Models. Here are the abbreviated financial statements for Planners Peanuts:
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INCOME STATEMENT
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2003
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Sales
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$2,000
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|
Cost
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1,500
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|
Net income
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$500
|
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BALANCE SHEET, YEAR-END
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|
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2002
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2003
|
|
|
2002
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2003
|
|
Assets
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$2,500
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$3,000
|
|
Debt
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$833
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$1,000
|
|
|
|
|
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Equity
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1,667
|
2,000
|
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Total
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$2,500
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$3,000
|
|
Total
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$2,500
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$3,000
|
If sales increase by 20 percent in 2004, and the company uses a strict percentage of sales planning model (meaning that all items on the income and balance sheet also increase by 20 percent), what must be the balancing item? What will be its value?
Question 2. Working Capital Management. Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.
Question 3. Cash Conversion Cycle. What effect will the following events have on the cash conversion cycle?
a. Higher financing rates induce the firm to reduce its level of inventory.
b. The firm obtains a new line of credit that enables it to avoid stretching payables to its suppliers.
c. The firm factors its accounts receivable.
d. A recession occurs, and the firm’s customers increasingly stretch their payables.
Question 4. Lock Boxes. Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes with an average payment size of $2,000. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .015 percent per day.
a. If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?
b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system?
Question 5. Trade Credit Rates. A firm currently offers terms of sale of 3/20, net 40. What effect will the following actions have on the implicit interest rate charged to customers that pass up the cash discount? State whether the implicit interest rate will increase or decrease.
a. The terms are changed to 4/20, net 40.
b. The terms are changed to 3/30, net 40.
c. The terms are changed to 3/20, net 30.
Question 6. If you were a credit manager, to which financial ratios would you pay most attention?