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Chapter 3: 5DQ (page 182)

“The most appropriate financing pattern would be one in which asset build-up and length of financing terms are perfectly matched.” Discuss the difficulty involved in achieving this financing pattern.

Short Answer

Expert verified

Financing pattern is difficult to achieve as no financial planner can appropriately determine the timing of build-up and length of financing required.

Step by step solution

01

Meaning of financing pattern

Financing pattern refers to the manner of obtaining finance for meeting the company’s requirements. This pattern is useful for managing the operational and financial goals of the company

02

The difficulty in the mentioned financial pattern

The financial planner cannot determine the mentioned financial pattern and for it, the planner should have appropriate information regarding the timing of the asset build-up and the length of financing available at a given time.

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Most popular questions from this chapter

Tobin Supplies Company expects sales next year to be \(500,000. Inventory and accounts receivable will increase \)90,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 40 percent dividend pay-out. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.

e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

d. Construct a cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is \)3,000, which is also the minimum desired.

What is an asset-backed public offering?

A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.
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