Problem One:
Key financial data from the most recent annual report of Derson Manufacturing is listed below.
Sales $12.7 million
Net income $1.3 million
Total assets $7.6 million
Total equity $5.2 million
Dividends $0.3 million
The firm’s CFO wishes to use this data to estimate the firm’s sustainable growth rate.
A) Use the data provided to calculate Derson’s net profit margin, assets-to-equity ratio, asset turnover ratio, and its dividend payout ratio.
B) Use your findings in part (a) to find Derson’s sustainable growth rate.
C) Interpret the sustainable growth rate calculated in part (b). Does this rate of growth assure shareholder wealth maximization? Explain.
D) If the firm’s Board feels that it is best for its shareholders to grow the firm more slowly, what alternations in each of the baseline assumptions would be necessary to achieve this objective?
Problem Two:
A firm has actual sales of $50,000 in January and $70,000 in February. It expects sales of $90,000 in March and $110,000 in both April and May. Assuming that sales are the only source of cash inflow, and that 60 percent of these are for cash and the rest are collected evenly the following two months, what are the firm’s expected cash receipts for March, April, and May?
Problem Three:
Heriot Company currently has an average collection period of 55 days and annual sales of $1 billion. Assume a 365-day year.
a. What is the firm’s average accounts receivable balance?
b. If the variable cost of each product is 64 percent of sales, what is the average investment in accounts receivable?
c. If the equal-risk opportunity cost of the investment in accounts receivable is 12 percent, what is the total annual cost of the resources invested in accounts receivable?