Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 21, Problem 13P
Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 40%.
- a. What is the expected
return on equity under each current asset level? - b. In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not?
- c. How would the overall risk of the firm vary under each policy?
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Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 40%. Payne’s debt interest rate is currently 8%. You are to evaluate three different current asset policies:
(1)
a restricted policy in which current assets are 45% of projected sales,
(2)
a moderate policy with 50% of sales tied up in current assets, and
(3)
a relaxed policy requiring current assets of 60% of sales.
Earnings before interest and taxes are expected to be 12% of sales. Payne’s tax rate is 25%.
What is the expected return on equity under each current asset level?
In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not?
How would the overall risk of…
Some parts of the balance sheet and income statement of PaintsWorld Enterprises is given below.
You know that the effective tax rate is 23.0% and the interest rate the company pays on its long-term debt is 11.0%.
You also know that the outstanding debt has been constant over the past few years.
1.Find the leverage ratio in 2022:
2. Find the asset turnover for 2022:
Referring to the following data of the Omani Company, that extracted from the balance sheet at 31122019.
answer the following questions:
(Note; Write all Equations regarding the questions)
1. The company manager targets to reduce the current ratio in the year (2020) by 33%
from the previous year (2019), this requiring to downsize the amount of the total
current asset. To what level can the manager reduce the total current asset to achieve
this target at (2020)? (Suppose the other things are fixed)
2. The manager put a plan to reduce the selling period in the (2020) by (16.7%) from
the previous year (2019). Calculate the new inventory turmover.
(Suppose the other things are fixed)
Data of 2019
Total Asset Turmover
2 Times
Net Fixed Asset
400 (Thousand OMR)
400 (Thousand OMR)
2000 (Thousand OMR)
Total Liabilities
Sales
Quick Ratio
1.5 Times
Accounts Receivable
150 (Thousand OMR)
200 (Thousand OMR)
Long-term Liabilities
Chapter 21 Solutions
Intermediate Financial Management (MindTap Course List)
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