Daggy Corporation has the following simplified balance sheet: Cash 25,000 Current liabilities 200,000 Inventories 190,000 Long-term debt 300,000 Accounts receivable 125,000 Common equity 200,000 Net fixed assets 360,000 Total assets 700,000 Total claims 700,000 The company has been advised that their credit policy is too generous and that they should reduce their days sales outstanding to 36 days (assume a 365-day year). The increase in cash resulting from the decrease in accounts receivable will be used to reduce the company’s long-term debt. The interest rate on long-term debt is 10 percent and the company’s tax rate is 30 percent. The tighter credit policy is expected to reduce the company’s sales to $730,000 and result in EBIT of $70,000. What is the company’s expected ROE after the change in credit policy?
Daggy Corporation has the following simplified balance sheet:
Cash 25,000 Current liabilities 200,000
Inventories 190,000 Long-term debt 300,000
Net fixed assets 360,000
Total assets 700,000 Total claims 700,000
The company has been advised that their credit policy is too generous and that they should reduce
their days sales outstanding to 36 days (assume a 365-day year). The increase in cash resulting from
the decrease in accounts receivable will be used to reduce the company’s long-term debt. The interest
rate on long-term debt is 10 percent and the company’s tax rate is 30 percent. The tighter credit policy
is expected to reduce the company’s sales to $730,000 and result in EBIT of $70,000. What is the
company’s expected ROE after the change in credit policy?
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