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##### Earnings before interest and taxes for both firms are $30 million, and the effective federalplus-

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**Question**

Supply Chains and \Yorking Capital ivlanagement;Earnings before interest and taxes for both firms are $30 million, and the effective federalplus-state tax rate is 40o/o.;a. lVhat is the return on equity for each firm if the interest rate on current liabilities is;109/o;and the rate on long-term debt is;139i,?;b. Assume that the short-term rate rises to 20o/o, that the rate on nerv long-term debt;rises to 160,6, and that the rate on existing long-term debt remains unchanged. What;rvould be the return on equity for Vanderheiden Press and Herrenhouse Publishing;under these conditions?;c. \{rhich company is in a riskier position? Why?;Iasy Problerxs 1*5;G5-1);C*sh Management;sales of $10 rnillion and an inventory turnover ratio of;2. The company is nol, adopting a new inventory system. If the nerv system is able to;reduce the firm's inventory leve1 and increase the firm's inventory turnol,er ratio to 5;rvhile maintaining the same ler.el of sales, horr., much cash will be freed up?;16-2);Medrvig Corporation has a DSO of i7 days. The company averages $3,500 in credit sales;each day. What is the company's average accounts receivable?;Receivables;Investment;(r6-s);-.: ofTrade Credit;I;$6-4),,gt of Trade Credit;ili;l;{16-s};Accounts Payable.;Williams & Sons last year reported;What is the nominal and effective cost of trade credit under the credit terms of 3/15;net 30?;A large retailer obtains merchandise under the credit terms o{ lll5, net 45, but routinely;takes 60 days to pay its biils. (Because the retailer is an important customer, suppliers;allorv the firm to stretch its credit terms.) What is the retailer's effective cost of trade;credit?;A chain of appliance stores, APP Corporation, purchases ilventory rvith a net price of;5500,000 each day. The company purchases tlie inventory under the credit terms of 2/15;net 40. APP alrvays takes the discount but takes the full t5 days to pay its bills. What is the;average accounts payable for APP?;Intermediate;Problems 5-12;Receivables;Snider Industries sells on terms of 2110, net 45. Total sales for the)rear are $1,500,000.;Thirty percetrt of customers pay on the 10th day and take discounts, the other TAYo pay;Investment;on average, 50 days after their purchases.;(16-6);a. What is the days sales outstanding?;b. What is the average amount of receivables?;c. What rvould happen to average receivables if Snider toughened its collection policy;with the result that ail nondiscount customers paid on the 45th day?;ftou-r1.-;-.;of Trade Credit;Calculate the nominal annual cost of nonfree trade credit under each of the following;terms. Assume that payment is made either on the discount date or on the due date.;a. 1/15, net;b. 2/10, net;c. 3/10, net;20;60;45;2110, rct 45;e. 2115, r,et 40;d.;Part;674;{15-8);Cost ofTrade Credit;{16-e);Cost of Trade Credit;i16-10);Effective Cost of;Trade Credit;ft t'u'"l;Cash Conversion;CYcle;a.;7;lanaging Clobal Operations;If a firm buys under terms of 3/15, net 45, but actuaily pays on the 20th;da1';utl6;-,r;takes the discotttrt,'rvhat is the nominal cost of its nonfree trade credit?;b. Does it receive more or less credit than it n'ould if it paid rvithin 15 days?;rct 40. Gross sales last year \l'ere 64,562,-.i;averaged $437,500. Half of Grunervald's customers paid on the;and accounts receivable;1Oth day and took discounts. \Yhat are the nominal and eff-ective costs of trade credit;Grunervald's nondiscount customers? (Hiilf: Calculate daily sales based on a 365-day y'e;then caiculate average receivables of discount customers, and then find the DSO for tl:.;nondiscount customers.);Grune.rr.ald Industries sells on terms of 21L0;The D.f. Masson Corporation needs to raise $500,000 for I year to supply rvorking capit;to a neu, store. Masson buys from its suppiiers on terms of 3/10, net 90, and it currenilpays on the 10th day and takes discounts. Horvever, it couid forgo the discounts, pa)'r;the 90th day, and thereby obtain the needed $500,000 in the form of costiy trade cred;What is the effective annual interest rate of this trade credit?;Negus Enterprises has an inventory conyersion period of 50 days, an average coliectio,-.;period of 35 days, and a payables deferral period of 25 days. Assume that cost of gooc;sold is 807o of sales.;a. What is the length of the firm's cash conversion cycle?;b. If Negus's annual sales are $4,380,000 and ail sales are on credit, rvhat is the firm;investment in accounts receiyabie?;c. Hou, many times pet year does Negus Enterprises turn over its inventory?;{16-L2l;Working Capital;Cash Flow Cycle;s;Strickler Technology is considering changes in its rr.orking capital policies to improve;cash florc c1,cle. Strickler's sales last 1,ear rvere 53,250,000 (a11 on credit), and its net pro:.;margin was 7o/a. Its inventory turnover nas 6.0 times during the year, and its DSO l'ai;41 days. Its annual cost of goods sold t'as $1,800,000. The firm had fixed assets totaiir-;$535,000. Strickler's payables deferral period is 45 da1's.;a. Calculate Strickler's cash conversion cycle.;b. Assuming Strickler holds negligible amounts of cash and marketable securities;c.;Challenging;Froblems 19-17;E6-131;Working Capital;Policy;calculate its total assets turno\ier ar-rd ROA.;Suppose Strickler's managers believe the annual inventory turnover can he raised;9 times rvithout affecting sales. \'trrhat rvould Strickler's cash coilrersion c1,cle, totai asst;turnover, and ROA have been if the inventory turnol'er had been 9 for the year?;Payne Products's sales last year were an anemic $1.6 million, but rvith an improved;product mix it expects sales grorvth to be 25%o this year, and Payne rvould like to;determine the effect of various current assets policies on its financial performance. Par-r:;has $1 million of fixed assets and intends to keep its debt ratio at its historicai level oi;6096. Payne's debt interest rate is currently 8o/o, You are to evaluate three different curre;asset policies: (1) a tight policy in rvhich current assets are 45o/o ofprojected sales, (2);moderate policy with 50oh of sales tied up in current assets, and (3) a relaxed policl;requiring current assets of 600/o of sales. Earnings before interest and taxes is expected;be l2o/o of sales. Payne's tax rate is 4096.;a. What is the expected return on equity under each current asset level?;u,e have assumed that the level of expected sales is independent r;current asset policy. Is this a valid assumption? \\&y or rvhy not?;c. Hou' u,ould the overall riskiness of the firm vary under each policy?;b. In this problem;View Full Attachment

Paper#29960 | Written in 18-Jul-2015

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