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Title: Working Capital Management- Sample Exercises and Solutions
Description: This note includes sample exercises regarding working capital, solutions, and recommendations of what works best for the company.
Description: This note includes sample exercises regarding working capital, solutions, and recommendations of what works best for the company.
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FINANCIAL MANAGEMENT
SATURDAY, 9:00 AM to 7:30 PM
Assignment on Working Capital Management:
A
...
has sales of $10 million per year, all on credit terms calling for payment within 30 days
...
SOLUTION:
GIVEN: Sales = $ 10M
Terms= 30 days
Accounts Receivable= $ 2M
Required:
1
...
2602
π΄π£πππππ πΆππππππ‘πππ ππππππ (π΄πΆπ ππ π·ππ) = 73
...
What would it be if all customers paid on time? 30 days
If all customers paid on time, then the firmβs DSO = 30 days
...
8082
πβπ ππππβ² π π΄ππππ’ππ‘ π πππππ£ππππ ππ $πππ, πππ
...
How much capital would be released if Concorde could take action that led to on-time payments?
$ 1,178,082
πΆππ β πππππ π’π = π πππππ£πππππ β π πππππ£πππππ ππ πππ‘πππ πππ¦ππππ‘π
πΆππ β πππππ π’π = $ 2,000,000 β $ 821,917
...
19
π΄ππ π€ππ = $ π, πππ, πππ
...
Miami Company is considering the modification of its current assets investment policy
...
Fixed assets are $600,000, interest rate is 10% on all debt, and the federal-plus-state tax rate
is 40%
...
Sales are projected at $3 million and the EBIT/sales
ratio at 15%
...
Prepare the forecasted financial statements under each alternative current assets investment policies and
compute for the expected return on equity
...
Which of the three alternatives are you going to recommend and why?
SOLUTION:
GIVEN:
Sales = $3M
Fixed assets = $600,000
Interest rate = 10%
Federal-plus-state tax rate = 40%
Maintain a 50% debt-to-asset ratio
EBIT/sales ratio @ 15%
Current assets = (1) 40% (2) 50% (3) 60%
of projected sales
1
...
71%
$ 450,000
$ 120,000
$ 330,000
$ 132,000
$ 198,000
16
...
40
= $1,200,000
Current
assets
Sales x 50%
= $3,000,000 x
...
50 x $1,800,000
= $ 900,000
Debt
Debt ratio= Total Debt/Total Assets
50%= Total Debt/ $2,100,000
Total Debt=
...
15
= $ 450,000
EBIT
= Sales x
...
10
= $ 90,000
Interest
= Debt x interest rate
= $1,050,000 x
...
40
= $ 144,000
Taxes
= EBT x Tax Rate
= $ 345,000 x
...
71%
3
Current assets
Sales x 50%
=$3,000,000 x
...
50 x $2,400,000
= $1,800,000
= $ 1,800,000 + $ 600,000
$ 600,000
= $2,400,000
50%= Total Debt/ $ 2,400,000
= $ 1,200,000
Equity
= Total Assets β Total Debt
Total
liability/equity
= Debt + Equity
EBIT
= Sales x
...
10
= $ 120,000
Earnings
before taxes
Taxes
Net income
ROE
EBT= EBIT β Interest
= $ 450,000 - $ 120,000
= $ 330,000
= $ 2,400,000 - $ 1,200,000
= $ 1,200,000 + $ 1,200,000
= $ 1,200,000
= $ 2,400,000
= $ 450,000
= EBT x Tax Rate
= $ 330,000 x
...
5%
2
...
It may have the least projected
amount for current assets (40% of Sales = $ 1,200,000) and total assets ($ 1,800,000) among the three
policies but it projected the highest net income ($ 216,000) which is favorable to the business itself as it
show that among the three policies, the first policy projected the effectiveness of the firm in operating and
utilizing its assets
...
Title: Working Capital Management- Sample Exercises and Solutions
Description: This note includes sample exercises regarding working capital, solutions, and recommendations of what works best for the company.
Description: This note includes sample exercises regarding working capital, solutions, and recommendations of what works best for the company.