Question

Best Buy Co Inc. reported the following financial information in a recent financial statement ($ millions). Based on the information below, compute the additional working capital financing period.

Sales …………………………………$50,272
Cost of sales …………………………………37,611
Inventory …………………………………5,897
Accounts receivable …………………………………2,348
Accounts payable …………………………………4,894

La Verne Company reports the sales and collection information below. Assume La Verne Company collects 20 percent of its sales in the month of the sale, 50 percent the next month, 25 percent the following month, and 5 percent is never collected. Compute the company’s cash collections for each month from January through April.

   Nov.         Dec. Jan.          Feb. Mar.          Apr.
Sales. . . . $200,000 $325,000 $250,000 $240,000 $260,000 $270,000

La Verne Company reports the purchase information below. Assume La Verne Company makes cash payments of 40 percent of its purchases in the month of the purchase and pays the remaining 60 percent the following month. Compute the company’s cash payments for each month from January through April.

        Dec.          Jan. Feb.         Mar. Apr.
Purcahse..... $210,000 $150,000 $170,000 $180,000 $190,000

Use the information below, from the La Verne Company, together with the information in Questions 2 and 3, to construct a cash budget for the La Verne Company for January through April. The La Verne Company began January with a cash balance of $100,000.

                          Jan.   Feb. Mar.        Apr.
Miscellaneous cash payments . . . . . $25,000 $30,000 $22,000 $32,000

Procter and Gamble (P&G) reports the following information in a recent financial statement (the figures represent millions except for Earnings per share and Dividends per share). Use the below information to compute P&G’s sustainable growth rate for Years 2 and 3 and comment on P&G’s sustainable growth rate relative to its actual rate of growth.

	Year 1	Year 2	Year 3
Sales	$56,741	$68,222	$83,503
Net income	8,684	10,340	12,075
Shareholders’ equity	62,908	66,760	69,494
Earnings per share	2.79	3.22	3.86
Dividends per share	1.15	1.28	1.45

Answer 1

1. Best Buy Co. Inc. :

Days sales outstanding = (365 x Accounts Receivable) / Sales = 17.05 days

Inventory conversion period = ( 365 x Inventory ) / Cost of Sales = 57.23 days

Payables deferral period = ( 365 x Accounts Payable) / Cost of Sales = 47.49 days

Additional working capital financing period = 17.05 days + 57.23 days - 47.49 days = 26.79 days.

2. La Verne Company:

La Verne Company Cash Budget For the four months ending April 30
	January	February	March	April	Total
Beginning Cash Balance	$ 100,000	$151,500	$ 217,750	$ 256,250	$ 100,000
Add: Total Cash Receipts	262,500	254,250	234,500	244,000	995,250
Total Cash Available	362,500	405,750	452,250	500,250	1,095,250
Less: Cash Disbursements for
Merchandise Purchases	186,000	158,000	174,000	184,000	702,000
Miscellaneous Expenses	25,000	30,000	22,000	32,000	109,000
Total Cash Disbursements	211,000	188,000	196,000	216,000	811,000
Cash Surplus ( Deficit)	151,500	217,750	256,250	284,250	284,250

Schedule of Cash Collections from Sales:

	January	February	March	April	Total
Cash Sales	50,000	48,000	52,000	54,000	204,000
Collection of Credit Sales of
November	50,000	0	0	0	50,000
December	162,500	81,250	0	0	243,750
January	0	125,000	62,500	0	187,500
February	0	0	120,000	60,000	180,000
March	0	0	0	130,000	130,000
Total Cash Collections	262,500	254,250	234,500	244,000	995,250

Schedule of Cash Disbursements for Merchandise Purchases:

	January	February	March	April	Total
In the month of purchase	60,000	68,000	72,000	76,000	276,000
In the following month	126,000	90,000	102,000	108,000	426,000
Total Cash Disbursements	186,000	158,000	174,000	184,000	702,000