ADM 2350 Fall 2007 Assign 4 Solns

ADM 2350 Fall 2007 Assign 4 Solns - ADM 2350 SECTIONS A B C...

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ADM 2350 SECTIONS A, B, & C FINANCIAL MANAGEMENT Fall 2007 Assignment #4 Solutions GENERAL INSTRUCTIONS: This assignment is due at the beginning of the lab on Wednesday, November 28, 2007 for Section C and Friday, November 30, 2007 for Sections A & B. It is your responsibility to hand in your assignment directly to the tutor for lab associated with the section in which you are registered. Please do not hand in your assignment in the wrong lab or to the professor. This assignment counts 5% of your course grade. You are encouraged to work on this assignment in teams of up to 5 students from the same section of this course. Nevertheless , you may turn in an individual assignment if you prefer. Each assignment must be typed and contain the student name(s) and student number(s) on each page. A statement of integrity must be attached to each assignment. Each individual whose name appears on the assignment must sign the statement of integrity. See p. 8 of the course syllabus for the integrity statement. Sam Wong was recently hired as the financial manager of Blue Office Furnishings, a small manufacturer of upscale office furniture. His first assignment is to develop a rational working capital policy. Wong has identified three potential policies: (1) an aggressive policy calling for a minimum amount of working capital and for substantial use of short-term debt, (2) a conservative policy calling for a high working capital level and primary reliance on long-term, as opposed to short-term, debt, and (3) a moderate policy falling between the two extremes. Wang estimates that the balance sheet under each policy will look like this (in thousands of dollars): Aggressive Moderate Conservative Current assets Net fixed assets Total assets Short-term debt (4%) Long-term debt (6%) Common equity Total claims $300 $300 $600 $350 $300 $650 $400 $300 $700 $300 $ 0 $300 $600 $150 $150 $350 $650 $ 0 $300 $400 $700 Short-term debt costs 4.0 percent, while long-term debt costs 6.0 percent. Variable costs are expected to be 60 percent of sales regardless of which working capital policy is adopted, but fixed costs increase if more current assets are held, because of increased storage and insurance costs. Annual fixed costs will be $80,000 under an aggressive policy, $85,000 with a moderate policy, and $90,000 under a conservative policy.
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