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FM27 18 - figures for accounts receivable notes payable and...

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b. Assume that, on average, the brothers expect annual sales of 18,000 items at an average price of $100 per item. (use a 365-day year.) 1. What is the firm’s expected days sales outstanding (DSO)? Answer: Days sales outstanding = DSO = 0.3(10) + 0.5(40) + 0.2(70) = 37 days, vs. 30-day credit period. One would expect some customers to pay somewhat slowly, so a 37- day DSO is probably not too bad. b. 2. What is its expected average daily sales (ADS)? Answer: Average daily sales = ADS = 365 ) 100 ($ 000 , 18 = $4,931 per day. b. 3. What is its expected average accounts receivable level? Answer: Accounts receivable (A/R) = (DSO)(ADS) = 37($4,931) = $182,466. Thus, $182,466 of receivables are outstanding, and the firm must raise capital to carry receivables. If collections could be speeded up, and DSO reduced, then A/R, and hence the required financing, would be reduced. b. 4. Assume that the firm’s profit margin is 25 percent. How much of the receivables balance must be financed? What would the firm’s balance sheet
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Unformatted text preview: figures for accounts receivable, notes payable, and retained earnings be at the end of one year if notes payable are used to finance the investment in receivables? Assume that the cost of carrying receivables had been deducted when the 25 percent profit margin was calculated. Answer: Although the firm has $182,466 in receivables, the entire amount does not have to be financed, since 25 percent of the sales price is profit. This means that 75 percent of the price represents costs of materials, labor, rent, utilities, insurance, and so on. Thus, the firm must finance only 0.75($182,466) = $136,849 of the receivables balance. Disregarding other assets and liabilities, its balance sheet would look like this if notes payable are used to finance receivables: Accounts receivable $182,466 Notes payable $136,849 Retained earnings 45,616 $182,466 Mini Case: 27- 18 b. 5. If bank loans have a cost of 12 percent, what is the annual dollar cost of carrying the receivables?...
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