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In: Finance

Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last...

Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 60% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?

Select the correct answer.

a. $91.65
b. $88.35
c. $93.30
d. $90.00
e. $94.95

Solutions

Expert Solution

Solution:

The answer is d. $90.00 worked out as below

Last year's information for Weber Interstate Paving Co.:

Sales = $450 million

Fixed Assets = $225 million

Fixed Assets / Sales = 50%

Capacity uilisation of fixed assets = 60%

Calculations at full capacity:

Had Weber Interstate Paving Co. to operate at full capacity of its Fixed Assets its:

Sales at full capacity = $450 / 60% = $750 million

Fixed Assets / Sales at full capacity = ($225 / $750) x 100 = 30% ......(of actual sales)

Since actual sales are held constant at $450 million under the new scenario while operating at full capacity, the Fixed Assets should be 30% of the actual sales of $450 million.

Hence, the fixed assets required = $450 x 30% = $135 million

Fixed assets are $225 million book value and the excess is not required.

Hence, if the company had been able to sell off enough of its fixed assets at book value, it could sell and generate cash of $225 - $135 = $90 million

Thus, the answer is d. $90.00

jeff jeffy answered 1 year ago
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