SOLUTIONS CHAPTER 6

SOLUTIONS CHAPTER 6 - CHAPTER 6 AN OVERVIEW OF WORKING...

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Unformatted text preview: CHAPTER 6 AN OVERVIEW OF WORKING CAPITAL MANAGEMENT 6-1 (a) Sales $500,000 EBT (10% of sales) 50,000 Less: taxes at 40% 20,000 EAT $ 30,000 (b) (c) New total assets = $200,000 + $50,000 = $250,000 Earnings $50,000 Less: interest (5% of $50,000) 2,500 Earnings before taxes $47,500 Less: taxes at 40% 19,000 Earnings after taxes $28,500 Return on total assets 6-2 Current Assets/Sales 30% 50% 70% Sales $200,000 $200,000 $200,000 Earnings after taxes $ 20,000 $ 20,000 $ 20,000 Current assets $ 60,000 $100,000 $140,000 Fixed assets 50,000 50,000 50,000 Total assets $110,000 $150,000 $190,000 Rate of return on assets 18.2% 13.3% 10.5% 6-3 (a) Conservative Moderate Aggressive Total assets $200,000 $200,000$200,000 Equity $100,000 $100,000$100,000 Short-term debt (7%) - $ 50,000$100,000 Long-term debt (10%)$100,000 $ 50,000- EBT (20% of assets) $ 40,000 $ 40,000 $ 40,000 Less: interest 10,000 8,500 7,000 $ 30,000 $ 31,500$ 33,000 Less: taxes at 50% 15,000 15,750 $ 16,500 EAT $ 15,000 $ 15,750$ 16,500 Return on equity 15.00% 15.75% 16.50% (b) Conservative Moderate Aggressive Current assets $100,000 $100,000$100,000 Short-term debt 50,000 100,000 Current ratio Infinite2 to 1 1 to 1 6-4 Alternative A Alternative B Fixed assets $1,000,000 $1,000,000 Current assets 1,000,000 400,000 Total assets $2,000,000 $1,400,000 Short-term debt (5%) $ 100,000 $ 500,000 Long-term debt (10%) 900,000 200,000 Total debt $1,000,000 $ 700,000 Equity 1,000,000 700,000 Total debt & net worth $2,000,000$1,400,000 EBIT $ 200,000 $ 200,000 Less: interest 95,000 45,000 EBT $ 105,000 $ 155,000 Less: taxes at 50% 52,500 77,500 EAT $ 52,500 $ 77,500 Rate of return on equity 5.25% 11.07% Current ratio 10 to 1 0.8 to 1 6-5 (a) $20,000 - $16,000 = $4,000...
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SOLUTIONS CHAPTER 6 - CHAPTER 6 AN OVERVIEW OF WORKING...

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