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Chapter 3: Q4DQ (page 182)
How is a cash budget used to help manage current assets?
The Cash budget provides a forecast of the cash flows and this helps in determining the build-up of each current asset and reduction of the same.
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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.
b. What would be Henderson’s incremental after-tax return on investment?
Colter Steel has \(4,200,000 in assets.
Temporary current assets | \)1,000,000 |
Permanent current assets | \(2,000,000 |
Fixed assets | \)1,200,000 |
Total assets | \(4,200,000 |
Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are \)996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.
Since the mid-1960s, corporate liquidity has been declining. What reasons can you give for this trend?
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January | \(8,500 |
February | \)2,500 |
March | \(3,500 |
April | \)8,500 |
May | \(9,500 |
June | \)4,500 |
Short-term financing will be utilized for the next six months.
January | 9% |
February | 10% |
March | 13% |
April | 16% |
May | 12% |
June | 12% |
Here are the projected annual interest rates:
a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer, add up the monthly interest payments.
b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.
Sharpe Knife Company expects sales next year to be \(1,550,000 if the economy is strong, \)825,000 if the economy is steady, and $550,000 if the economy is weak. Mr. Sharpe believes there is a 30 percent probability the economy will be strong, a 40 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?
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