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Chapter 3: Q5DQ (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

This 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

This Financing pattern refers to the manner of obtaining the 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

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?

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be \)240,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by \(150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.

Assume that Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is two times.

d. What would be the total incremental investment in accounts receivable and inventory to support a \)65,000 increase in sales?

Discuss the relative volatility of short- and long-term interest rates

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?
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