ST-01 The Calgary Company: Alternative Balance Sheets

Restricted Moderate Relaxed

40% 50% 60%
Current Assets (%age of sales) 1,200,000 1,500,000 1,800,000
Fixed Assets (given in the question) 600,000 600,000 600,000
Total Assets 1,800,000 2,100,000 2,400,000
Debt (50% of Total Assets) 900,000 1,050,000 1,200,000
Equity (50% of Total Assets) 900,000 1,050,000 1,200,000
Total Debt and equity 1,800,000 2,100,000 2,400,000
The Calgary Company: Alternative Income Statements
Sales (given in th question) 3,000,000 3,000,000 3,000,000
EBIT @ 15% on Sales 450,000 450,000 450,000
Less: 10% interest on debt 90,000 105,000 120,000
EBT 360,000 345,000 330,000
Less: 40% Tax 144,000 138,000 132,000
Net Income 216,000 207,000 198,000
Return on Equity (ROE) 24.00% 19.71% 16.50%

ST-02 FIRM BANK

(a) Day 1: Deposit $ 500,000; write check for $1,000,000 (500,000) 500,000
Day 2: Write check for $1,000,000 (1,500,000) 500,000
Day 3: Write check for $1,000,000 (2,500,000) 500,000
Day 4: Write check for $1,000,000; deposit $1,000,000 (2,500,000) 500,000
After Upton has reached a steady state, it must deposit $1,000,000 each day to cover
the checks written 3 days earlier
(b) The firm has 3 days of float; not untill Day 4 does the firm have to make any
additional deposits
(c) As shown above, Upton should try to maintain a balance on the bank's records of
$500,00. On its own books it will have a balance of minus $2,500,000
Q.1 Boudreaux Corporation
A) CASH CONVERSION CYCLE = 75 + 38 - 30 = 83
B) AVERAGE SALES PER DAY (3,375,000 360) 9,375
INVESTMENT IN RECEIVABLES 356,250
C) INVENTORY TURNOVER (360 75 ) 4.80
Q.2 Troan Corporation
NET FLOAT = DISBURSEMENT FLOAT - COLLECTION FLOAT
(4 x 10,000) - (3x10,000) 10,000
Q.3 Williams & Sons
EXISTING INV = INV T/O = SALES INV = (2 = 10,000,000 INV) 5,000,000
LESS: NEW INV = INV T/O = SALES INV = (5 = 10,000,000 INV) 2,000,000
CASH FREEDUP 3,000,000
Q.4 Medwig Corporation
AVERAGE A/R (3,500 x 17) 59,500
Q.6 McDowell Industries
A) DAYS SALES OUTSTANDING = 10 x 40% + 40 x 60% 28
B) AVERAGE RECEIVABLE = 28 x (900,000 360) 70,000
C) DAYS SALES OUTSTANDING = 10 x 40% + 30 x 60% 22
AVERAGE RECEIVABLE = 22 x (900,000 360) 55,000
SALES MAY ALSO DECLINE DUE TO TIGHTER CREDIT; SOME CUSTOMERS MAY ALSO
TAKE DISCOUNTS, RESULTING REDUCED A/R
Q.7 The Rentz Corporation
A) Restricted Moderate Relaxed
45% 50% 60%
Current Assets (%age of sales) 900,000 1,000,000 1,200,000
Fixed Assets (given in the question) 1,000,000 1,000,000 1,000,000
Total Assets 1,900,000 2,000,000 2,200,000
Debt (60% of Total Assets) 1,140,000 1,200,000 1,320,000
Equity (40% of Total Assets) 760,000 800,000 880,000
Total Debt and equity 1,900,000 2,000,000 2,200,000
The Calgary Company: Alternative Income Statements
Sales (given in th question) 2,000,000 2,000,000 2,000,000
EBIT @ 12% on Sales 240,000 240,000 240,000
Less: 8% interest on debt 91,200 96,000 105,600
EBT 148,800 144,000 134,400
Less: 40% Tax 59,520 57,600 53,760
Net Income 89,280 86,400 80,640
Return on Equity (ROE) 11.75% 10.80% 9.16%