Mantuhac, Anthony BSA-3

Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to
sell on credit. However, the firm has noticed a recent increase in its collection period. Last year,
total sales were $1 million, and $250,000 of these sales were on credit. During the year, the
accounts receivable account averaged $41,096. It is expected that sales will increase in the
forthcoming year by 50 percent, and, while credit sales should continue to be the same
proportion of total sales, it is expected that the days sales outstanding will also increase by 50
percent. If the resulting increase in accounts receivable must be financed externally, how much
external funding will Cannon need? Assume a 365-day year.
DSO = 41,076 / (250,000/365) = 60
NEW A/R = [(250,000)(1.5) / (365)] (60) (1.5) = 92,466
= 92, 466 – 41, 096
= 51,370

Zero Corp's total common equity at the end of last year was $430,000 and its net income was
$70,000. What was its ROE?
ROE = 70,000/430,000
ROE = 16.28%

Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent
annually on its bank loan. Alumbat’s annual sales are $3,200,000, its average tax rate is 40
percent, and its net profit margin on sales is 6 percent. If the company does not maintain a TIE
ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is
Alumbat’s current TIE ratio?

TIE = EBIT / interest expense

(EBIT – Interest expense) x (1-tax rate) = Net income
(EBIT – 80,000) x (1-40%) = 192,000
EBIT = 320,000 + 80,000
EBIT = 400,000

Interest expense = 800,000 x 10% = 80,000

TIE = 400,000/80,000
TIE = 5.00

Harwichport Company has a current ratio of 3.5 to 1 and an acid-test ratio of 2.8 to 1. Current
assets equal $175,000 of which $5,000 consists of prepaid expenses. Harwichport Company's
inventory must be
 Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes
receivable) Current liabilities
2.8 = n / current assets/current ratio
2.8 = n/50,000
N = 140,000
175,000 -140,000 = 35,000
35,000 - 5,000 = 30,000

Meyer Inc's assets are $745,000, and its total debt outstanding is $185,000. The new CFO wants
to establish a debt ratio of 55%. The size of the firm does not change. How much debt must the
company add or subtract to achieve the target debt ratio?

Debt ratio= total dect outstanding/ assets

0.55 = 77/745,000
Total debt =409,750-185,000
Add = 224,750

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end
assets were $250,000. The firm's total-debt-to-total-assets ratio was 67.5%. Based on the DuPont
equation, what was the ROE?

Sales $325,000
Assets $250,000
Net income $19,000
ROE = (net income/sales) x (sales/assets) x 1 /(1-67.53)
ROE = (19,000/325,000) X (325,000/250,000) X 1 /(0.325)
EOE = 0.058 X 1.30 X 3.077
ROE = 23.38%

Marcy Corporation's current ratio is currently 1.75 to 1. The firm’s current ratio cannot fall
below 1.5 to 1 without violating agreements with its bondholders. If current liabilities are
presently $250 million, the maximum new short-term debt that can be issued to finance an
equivalent amount of inventory expansion is

Current ratio = current assets/ current liabilities

1.75 = ? / 250,000,000
Current assets = 437,500,000
Current ratio = (current assets + new short term)/ current liabilities + new short term)
1.50 = (437,500,000 + n) / (250,000,000 + n)
New short-term debt = 125,000,000

Last year Ann Arbor Corp had $300,000 of assets, $305,000 of sales, $20,000 of net income, and
a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable
it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not
be affected. By how much would the cost reduction improve the ROE?

Debt = assets x debt ratio

= 300,000 x 37.5%
= 112,500

Equity = 300,000 – 112,500

= 187,500

Return on equity-old = 20,000/187,500 = 10. 67%

Return on equity-new = 33,000/187,500 = 17.6%

Percentage cost of reduction to improve ROE = (17.6% - 10.67%)

= 6.93%