Question

REGRESSION AND RECEIVABLES

Edwards Industries has $400 million in sales. The company expects that its sales will increase 14% this year. Edwards' CFO uses a simple linear regression to forecast the company's receivables level for a given level of projected sales. On the basis of recent history, the estimated relationship between receivables and sales (in millions of dollars) is as follows:

Receivables = $13.50 + 0.13(Sales)

1. Given the estimated sales forecast and the estimated relationship between receivables and sales, what are your forecasts of the company's year-end balance for receivables? Enter your answer in millions. For example, an answer of $25,000,000 should be entered as 25. Round your answer to two decimal places.
   $ million
2. 
   
3. What are your forecasts of the company's year-end days sales outstanding (DSO) ratio? Assume that DSO is calculated on the basis of a 365-days year. Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Part a: Year end balance of receivables

Sales leat year = $ 400 mn

Growth in sales = 14%

Sales expected this year = Sales last year * (1 + growth in sales)

Sales expected this year = $ 400 mn * (1 + 14%)

Sales expected this year = $ 456 mn

As given by the regression relationship, the receivables can be calculated as:

Receivables = $ 13.50 + 0.13 * (Sales)

Receivables = $ 13.50 + 0.13 * ($ 456 mn)

Receivables = $ 13.50 + $ 59.28 mn = $ 13.50 + $ 59,280,000 = $ 59,280,013.50

Receivables = $ 59.28 mn

At the end of the year, the receivables balance should be $59.28 mn.

Part b: Days Sales Outstanding Ratio

The Days Sales Outstanding (DSO) ratio can be calculated as:

DSO = Receivables / (Total Credit Sales / 365)

Assuming all sales were made on credit (no other information given),

Receivables: $ 59.28 mn ...(calculated above)

Total Credit Sales = $ 456 mn ....(calculated above)

Accordingly, we can calculate DSO as:

DSO = 59.28 / (456 /365)

DSO = 59.28 / 1.24931

DSO = 47.45

Company's year end days sales outstanding ratio would be 47.45