1) Partridge Inc. sells about $45 million a year on credit. Good credit and collections performance in the industry results in a 35 day ACP.
a. What is the maximum receivables balance Partridge can tolerate and still receive a good rating with respect to credit and collections? (Hint: Write the equation defining ACP, treat the A/R balance as the unknown, substitute given or target values and solve).
b. If Partridge is now collecting an average receivable in 40 days, by how much will it have to lower the receivables balance to achieve a good rating?
2) Epsom Co. manufactures furniture and sells about $40 million a year at a gross margin of 45%.
a. What is the maximum inventory level the firm can carry to maintain an inventory turnover (based on COGS) of 8.0?
b. If the inventory contains $1.2 million of obsolete and damaged goods which doesn’t turn over at all, how fast would the active inventory have to turn over to achieve an overall turnover rate of 8.0?
3) The Nelson Sheet Metal Company has current assets of $2.5 million and current liabilities of $1.0 million. The firm is in need of additional inventory and has an opportunity to borrow money on a short-term note with which it can buy the needed material. However, a previous financing agreement prohibits the company from operating with a current ratio below 1.8. What is the maximum amount of inventory Nelson can obtain in this manner. (Hint: The note will be a current liability and the purchased inventory will be a current asset of the same size, X. Form the limiting current ratio in terms of X and solve .)
4) Sweet Tooth Cookies, Inc. has the following ratios
ROE = 15%
T/A turnover = 1.2
ROS = 10%
What percentage of its assets are financed by equity? (Hint: Substitute into the Extended DuPont Equation.)
5) The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5, inventory turnover ratio (based on cost) of 3.0, and average collection period (ACP) of 45 days. Complete the following current section of the firm’s balance sheet.