Question

CURRENT ASSETS INVESTMENT POLICY

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 45% debt-to-assets ratio. Rentz's interest rate is currently 10% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 13% of total sales, and the federal-plus-state tax rate is 40%.

1. What is the expected return on equity under each current assets level? Round your answers to two decimal places.
   

   Restricted policy		%
   Moderate policy		%
   Relaxed policy		%

2. 
   
3. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption?
   1. No, this assumption would probably not be valid in a real world situation. A firm's current asset policies may have a significant effect on sales.
   2. Yes, this assumption would probably be valid in a real world situation. A firm's current asset policies have no significant effect on sales.
   3. Yes, sales are controlled only by the degree of marketing effort the firm uses, irrespective of the current asset policies it employs.
   4. Yes, the current asset policies followed by the firm mainly influence the level of long-term debt used by the firm.
   5. Yes, the current asset policies followed by the firm mainly influence the level of fixed assets.
   
   -Select-IIIIIIIVVItem 4
4. 
   
5. How would the firm's risk be affected by the different policies?
   
   The input in the box below will not be graded, but may be reviewed and considered by your instructor.

   Quantitative Problem: Adams Manufacturing Inc. buys $11.2 million of materials (net of discounts) on terms of 2/10, net 50; and it currently pays after 10 days and takes the discounts. Adams plans to expand, which will require additional financing. If Adams decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent. Do not round your intermediate calculations. Use 365 day in a year.
   $

   What would be the nominal and effective cost of such a credit? Round your answer to 2 decimal places. Do not round intermediate calculations. Use 365 day in a year.
   Nominal cost:  %
   Effective cost:  %

   If the company could receive the funds from a bank at a rate of 9.1%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Round your answer to 2 decimal places. Do not round intermediate calculations.
   ----- %

   Should Adams use bank debt or additional trade credit?
   -Select-The bank loan should be used.Additional trade credit should be used.

Winston Inc. is trying to determine the effect of its inventory turnover ratio and days sales outstanding on its cash conversion cycle. Winston's 2015 sales (all on credit) were $186,000 and its cost of goods sold was 75% of sales. It turned over its inventory 8.19 times during the year. Its receivables balance at the end of the year was $13,156.44 and its payables balance at the end of the year was $7,392.29. Using this information calculate the firm's cash conversion cycle. Round your answer to the nearest whole. Round the days amounts in your intermediate calculations to the nearest whole day. Do not round other intermediate calculations.
-------- days

Answer 1