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PS_4_Solutions - (Post Check)

# PS_4_Solutions - (Post Check) - BusM 401 Problem Set#4...

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BusM 401 Problem Set #4 Financial Instruments Solutions Use the following financial statements from Roxbury Corporation to answer questions 1 and 2. Financial Statements for Roxbury Corporation 2005 and 2006, in \$millions INCOME STATEMENT BALANCE SHEET 2005 2006 2005 2006 Net sales \$ 47,616 52,378 Cash & securities \$ 951 1,046 Cost of goods sold 40,718 44,790 Accounts receivable 6,666 7,333 GS&A expense 6,171 6,788 Inventories 5,236 5,760 EBIT 727 800 Net fixed assets 2,048 2,253 Interest expense 215 255 Total assets \$ 14,901 16,392 Earnings before tax 512 545 Tax 154 163 Bank loan \$ 392 547 Net income \$ 359 382 Accounts payable 7,419 8,161 Long-term debt 2,148 2,551 Total liabilities 9,959 11,259 Common stock 1,293 1,293 Retained earnings 3,649 3,840 Total equity 4,942 5,133 Total liabilities & equity \$ 14,901 16,392 1. Estimate the length of Roxbury’s cash conversion cycle in 2006. CCC = inventory pd. + receivables pd. – payables pd. =Inventory/(COGS/365) + Receivables/(Sales/365) – Payables/(COGS/365) = 5760/(44790/365) + 7333/(52378/365) – 8161/(44790/365) = 46.9 + 51.1 – 66.5 = 31.5 days

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2. What is Roxbury’s sustainable growth rate in 2006? g* = retention ratio X ROE retention ratio is 0.5 (equity increased by 191, divided that by net income of 382) ROE is 382/4942=7.72% (remember for sustainable growth, use beginning-of-period equity) g*= 0.5 X 7.72% = 3.9% 3. If a firm is offered payment terms of “1/15, net/30”, what is the implicit annual interest rate on the trade credit if the firm pays in 30 days rather than 15 days?
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PS_4_Solutions - (Post Check) - BusM 401 Problem Set#4...

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