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Chapter 14 Spreadsheet-Related Problem?Working Capital Policy

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Question;Chapter 14 Spreadsheet-Related Problem?Working Capital Policy Three companies?Aggressive, Moderate, and Conservative?have different working capital management policies as implied by their names. For example, Aggressive employs only minimal current assets, and it finances almost entirely with current liabilities plus equity. This restricted approach has a dual effect. It keeps total assets low, which tends to increase return on assets, but because of stock-outs and credit rejections, total sales are reduced, and because inventory is ordered more frequently and in smaller quantities, variable costs are increased. Condensed balance sheets for the three companies follow: Aggressive Moderate Conservative Current assets \$225,000 \$300,000 \$450,000 Fixed assets 300,000 300,000 300,000 Total assets \$525,000 \$600,000 \$750,000 Current liabilities (cost = 12%) \$300,000 \$150,000 \$ 75,000 Long-term debt (cost = 10%) 0 150,000 300,000 Total debt \$300,000 \$300,000 \$375,000 Equity 225,000 300,000 375,000 Total liabilities and equity \$525,000 \$600,000 \$750,000 Current ratio 0.75 2.0 6.0 The cost of goods sold functions for the three firms are as follows: Cost of Goods Sold = Fixed Costs + Variable Costs Aggressive: Cost of goods sold = \$300,000 + 0.70(Sales) Moderate: Cost of goods sold = \$405,000 + 0.65(Sales) Conservative: Cost of goods sold = \$577,500 + 0.60(Sales) Because of the working capital differences, sales for the three firms under different economic conditions are expected to vary as follows: Aggressive Moderate Conservative Strong economy \$1,800,000 \$1,875,000 \$1,950,000 Average economy 1,350,000 1,500,000 1,725,000 Weak economy 1,050,000 1,200,000 1,575,000 a. Construct income statements for each company for strong, average, and weak economies using the following format: Sales Less: Cost of goods sold Earnings before interest and taxes (EBIT) Less: Interest expense Earnings before taxes (EBT) Less: Taxes (at 40%) Net income (NI) NOTE: On page 245 of the text, there is an Example you will follow. To complete this problem, you will need to create a table that matches table 14.1, and turn that in also.

Paper#50289 | Written in 18-Jul-2015

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