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FS Analysis Exercises

Ruth Company currently has $1,000,000 in accounts receivable with a DSO of 50 days. It wants to reduce its DSO to the industry average of 32 days by pressuring customers to pay sooner. This would reduce average sales by 10% and accounts receivable. Assuming a 365 day year, what will accounts receivable be after the change?

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Lizzy Mondia
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116 views

FS Analysis Exercises

Ruth Company currently has $1,000,000 in accounts receivable with a DSO of 50 days. It wants to reduce its DSO to the industry average of 32 days by pressuring customers to pay sooner. This would reduce average sales by 10% and accounts receivable. Assuming a 365 day year, what will accounts receivable be after the change?

Uploaded by

Lizzy Mondia
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FS analysis exercises

Ruth Company currently has $1,000,000 in accounts receivable.  Its days sales
outstanding (DSO) is 50 days.  The company wants to reduce its DSO to the
industry average of 32 days by pressuring more of its customers to pay their
bills on time.  The company’s CFO estimates that if this policy is adopted the
company’s average sales will fall by 10 percent. Assuming that the company
adopts this change and succeeds in reducing its DSO to 32 days and does lose
10 percent of its sales, what will be the level of accounts receivable following
the change?  Assume a 365-day year.
A fire has destroyed a large percentage of the financial records of the Carter
Company.  You have the task of piecing together information in order to
release a financial report. You have found the return on equity to be 18
percent.  If sales were $4 million, the debt ratio was 0.40, and total liabilities
were $2 million, what would be the return on assets (ROA)?
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?
Pace Corp.'s assets are $625,000, and
its total debt outstanding is
$185,000.  The new CFO wants to employ
a debt ratio of 55%.  How much debt
must the company add or subtract to
achieve the target debt ratio?

625000 X 55% = 343750 – 185000= 158750


Bonner Corp.'s sales last year were
$415,000, and its year-end total assets
were $355,000.  The average firm in the
industry has a total assets turnover ratio
(TATO) of 2.4.  Bonner's new CFO believes
the firm has excess assets that can be sold
so as to bring the TATO down to the
industry average without affecting sales. 
By how much must the assets be reduced to
bring the TATO to the industry average,
holding sales constant?

ATO= 2.4 = SALES/ASSETS= 415,000


ASSETS= 415000/2.4= 172917
355000-172917=182083
Stewart Inc.'s latest EPS was $3.50,
its book value per share was $22.75, it
had 215,000 shares outstanding, and its
debt ratio was 46%.  How much debt was
outstanding?

BVPS = TOTAL SHE/OUTSANDING SHARE


22.75 = X/215000
TOTAL SHE = 4891250/(1-46%) OR 54%
TOTAL ASSET = 9057870
LIABILITY = ASSET – EQUITY
= 9057870 – 4891250
=4166620
Last year Vaughn Corp. had sales of $315,000 and a net
income of $17,832, and its year-end assets were $210,000. 
The firm's total-debt-to-total-assets ratio was 42.5%.  Based
on the Du Pont equation, what was Vaughn's ROE?
ROE = NI/EQUITY
= 17832/210000 x 57.5% (equity ratio)
14.77
Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of
1.75.  Its sales were $195,000 and its net income was $10,549.  The CFO believes
that the company could have operated more efficiently, lowered its costs, and
increased its net income by $5,250 without changing its sales, assets, or capital
structure.  Had it cut costs and increased its net income in this amount, by how
much would the ROE have changed?
ROE = NI/EQUITY
= 10549/83781 = 12.59
EQUITY MULTIPLIER= 1.75 =146617/EQUITY
EQUITY = 83781
ASSET TURNOVER= 1.33 = SALES/ASSET = 195000/ASSET
ASSET = 195000/1.33 = 146617
ROE = 15799/83781
= 18.86
18.86-12.59= 6.27
Quigley Inc. is considering two financial plans for the
coming year.  Management expects sales to be $301,770,
operating costs to be $266,545, assets to be $200,000,
and its tax rate to be 35%.  Under Plan A it would use
25% debt and 75% common equity.  The interest rate on
the debt would be 8.8%, but the TIE ratio would have to
be kept at 4.00 or more.  Under Plan B the maximum debt
that met the TIE constraint would be employed. 
Assuming that sales, operating costs, assets, the
interest rate, and the tax rate would all remain
constant, by how much would the ROE change in response
to the change in the capital structure?6

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