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. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
. On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm analyzes its accounts using a 365-day year, what is the firm’s inventory conversion period?
a. 365.0 days
b. 182.5 days
c. 30.3 days
d. 15.2 days
e. 10.5 days
. Biondi Manufacturing Company (BMC) has an average accounts receivable balance of $1,250,000, an average inventory balance of $1,750,000, and an average accounts payable balance of $800,000. Its annual sales are $12,000,000 and its cost of goods sold represents 80 percent of annual sales. Assume there are 365 days in a year. What is BMC’s cash conversion cycle?
a. 84.15 days
b. 53.23 days
c. 72.28 days
d. 100.55 days
e. 60.83 days
. Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable of $16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it pays on time. The firm’s managers are searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels but inventory can be lowered by $4,000,000 and accounts receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day.
a. +105 days
b. -105 days
c. +27 days
d. -27 days
e. -3 days
. You have recently been hired to improve the performance of Multiplex Corporation, which has been experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is your estimate of the firm’s current cash conversion cycle?
· Current inventory = $120,000.
· Annual sales = $600,000.
· Accounts receivable = $157,808.
· Accounts payable = $25,000.
· Total annual purchases = $365,000.
· Purchases credit terms: net 30 days.
· Receivables credit terms: net 50 days.
a. 49 days
b. 193 days
c. 100 days
d. 168 days
e. 144 days
. Kolan Inc. has annual sales of $36,500,000 ($100,000 a day on a 365-day basis). On average, the company has $12,000,000 in inventory and $8,000,000 in accounts receivable. The company is looking for ways to shorten its cash conversion cycle, which is calculated on a 365-day basis. Its CFO has proposed new policies that would result in a 20 percent reduction in both average inventories and accounts receivables. The company anticipates that these policies will also reduce sales by 10 percent. Accounts payable will remain unchanged. What effect would these policies have on the company’s cash conversion cycle?
a. -40 days
b. -22 days
c. -13 days
d. +22 days
e. +40 days
. Gaston Piston Corp. has annual sales of $50,735,000 and maintains an average inventory level of $15,012,000. The average accounts receivable balance outstanding is $10,008,000. The company makes all purchases on credit and has always paid on the 30th day. The company is now going to take full advantage of trade credit and pay its suppliers on the 40th day. If sales can be maintained at existing levels but inventory can be lowered by $1,946,000 and accounts receivable lowered by $1,946,000, what will be the net change in the cash conversion cycle? (Assume there are 365 days in the year.)
a. -14.0 days
b. -18.8 days
c. -28.0 days
d. -25.6 days
e. -38.0 days
. Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm’s average accounts receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annual interest. Cross is considering a regional lockbox system to speed up collections that it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system?
b. $ 30,000
c. $ 60,000
d. $ 55,000
e. $ 40,000
. Allen Brothers is interested in increasing its free cash flow (which it hopes will result in a higher EVA and stock price). The company’s goal is to generate $180 million of free cash flow over the upcoming year. Allen’s CFO has made the following projections for the upcoming year:
· EBIT is projected to be $850 million.
· Gross capital expenditures are expected to total $360 million, and its depreciation expense is expected to be $120 million. Thus, its net capital expenditures are expected to total $240 million.
· The firm’s tax rate is 40 percent.
The company forecasts that there will be no change in its cash and marketable securities, nor will there be any changes in notes payable or accrued liabilities. Which of the following will enable the company to achieve its goal of generating $180 million in free cash flow?
a. Accounts receivable increase $470 million, inventory increases $230 million, and accounts payable increase $790 million.
b. Accounts receivable increase $470 million, inventory increases $230 million, and accounts payable increase $610 million.
c. Accounts receivable decrease by $500 million, inventory increases by $480 million, and accounts payable decline by $80 million.
d. Accounts receivable decrease by $400 million, inventory increases by $480 million, and accounts payable increase by $80 million.
e. Accounts receivable increase by $500 million, inventory increases by $100 million, and accounts payable decline by $480 million.
. Short Construction offers its customer’s credit terms of 2/10, net 30 days, while Fryman Construction offers its customer’s credit terms of 2/10, net 45 days. The aging schedules for each of the two companies’ accounts receivable are reported below:
Short Construction Fryman Construction
Age of Value of Percentage of Value of Percentage of
Account (Days) Account Total Value Account Total Value
0-10 $58,800 60% $ 73,500 50%
11-30 19,600 20 29,400 20
31-45 14,700 15 29,400 20
46-60 2,940 3 10,290 7
Over 60 1,960 2 4,410 3
Total Receivables $98,000 $147,000
Which company has the greatest percentage of overdue accounts and what is their percentage of overdue accounts?
a. Fryman; 50% overdue.
b. Short; 20% overdue.
c. Fryman; 30% overdue.
d. Fryman; 3% overdue.
e. Short; 40% overdue.
. Jordan Air Inc. has average inventory of $1,000,000. Its estimated annual sales are $10 million and the firm estimates its receivables conversion period to be twice as long as its inventory conversion period. The firm pays its trade credit on time; its terms are net 30 days. The firm wants to decrease its cash conversion cycle by 10 days. It believes that it can reduce its average inventory to $863,000. Assume a 365-day year and that sales will not change. By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day reduction in its cash conversion cycle?
a. $ 101,900
c. $ 136,986
d. $ 333,520
e. $ 0
(The following information applies to the next three problems.)
Callison Airlines is deciding whether to pursue a
restricted or relaxed current asset investment policy. Callison’s annual sales are expected to total
$3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and
common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the
firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. If the company follows a restricted policy,
its total assets turnover will be 2.5.
Under a relaxed policy, its total assets turnover will be 2.2.
. If the firm adopts a restricted policy, how much will it save in interest expense (relative to what it would be if Callison were to adopt a relaxed policy)?
a. $ 3,233
b. $ 6,175
c. $ 9,818
d. $ 7,200
. What is the difference in the projected ROEs between the restricted and relaxed policies?
. Assume now the company expects that if it adopts a restricted policy, its sales will fall by 15 percent, EBIT will fall by 10 percent, but its total assets turnover, debt ratio, interest rate, and tax rate will remain the same. In this situation, what is the difference in the projected ROEs between the restricted and relaxed policies?