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(16-1) Cash Management
Williams & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s inventory level and increase the firm’s inventory turnover ratio to 5 while maintaining the same level of sales, how much cash will be freed up?
Inventory level now = 10/2 = 5 million
New level = 10/5 = 2 million
Saving in cash = 5-2 = $3 million
(16-2) Receivables Investment
Medwig Corporation has a DSO of 17 days. The company averages $3,500 in credit sales each day. What is the company’s average accounts receivable?
17*3500= $59500
(16-3) Cost of Trade Credit
What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30?
.03/.97*365/15 = 7.53%
(16-4) Cost of Trade Credit
A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer’s effective cost of trade credit?
.01/.99*365/45 = 8.19%
(16-5) Accounts Payable
A chain of appliance stores, APP Corporation, purchases inventory with a net price of $500,000 each day. The company purchases the inventory under the credit terms of 2/15, net 40. APP always takes the discount but takes the full 15 days to pay its bills. What is the average accounts payable for APP?
500000*15 = $7500000
Please Show the details of your calculation/work in your answer to the Problem.
(13-10) Corporate Valuation
The financial statements of Lioi Steel Fabricators are shown below—both the actual results for 2010 and the projections for 2011. Free cash flow is expected to grow at a 6% rate after 2011. The weighted average cost of capital is 11%.
a. If operating capital as of 12/31/2010 is $502.2 million, what is the free cash flow for 12/31/2011?
Net income for common stock holder 48.2
Add depreciation 39.8
Add Increase in Current liabilities 6.10
Less Increase in Current Assets 11.90
Less Purchase of Fixed Assets 62.30
Free Cash flow 19.90
b. What is the horizon value as of 12/31/2011?
19.9*1.06/.11-.06 = 421.88
c. What is the value of operations as of 12/31/2010?
19.9/.05 = 398
d. What is the total value of the company as of 12/31/2010?
421.88/1.11 = 380.07
e. What is the intrinsic price per share for 12/31/2010?
380.07/10= $38
Income Statements for the Year Ending December 31 (Millions of Dollars Except for Per Share Data)
Actual 2010 Projected 2011
___________________________________________________________
Net sales $ 500.0 $ 530.0
Costs (except depreciation) 360.0 381.6
Depreciation 37.5 39.8
Total operating costs $ 397.5 $ 421.4
Earnings before interest and taxes $ 102.5 $ 108.6
Less interest 13.9 16.0
Earnings before taxes $ 88.6 $ 92.6
Taxes (40%) 35.4 37.0
Net income before preferred
Dividends $ 53.2 $ 55.6
Preferred dividends 6.0 7.4
Net income available for common
Dividends $ 47.2 $ 48.2
Common dividends $ 40.8 $ 29.7
Addition to retained earnings $ 6.4 $ 18.5
Number of shares 10 10
Dividends per share $ 4.08 $ 2.97
Balance Sheets for December 31 (Millions of Dollars)
Actual 2010 Projected 2011
___________________________________________________________
Assets
Cash $ 5.3 $ 5.6
Marketable securities 49.9 51.9
Accounts receivable 53.0 56.2
Inventories 106.0 112.4
Total current assets $ 214.2 $ 226.1
Net plant and equipment 375.0 397.5
Total assets $ 589.2 $ 623.6
Liabilities and Equity
Accounts payable $ 9.6 $ 11.2
Notes payable 69.9 74.1
Accruals 27.5 28.1
Total current liabilities $ 107.0 $ 113.4
Long-term bonds 140.8 148.2
Preferred stock 35.0 37.1
Common stock (par plus PIC) 160.0 160.0
Retained earnings 146.4 164.9
Common equity $ 306.4 $ 324.9
Total liabilities and equity $ 589.2 $ 623.6
(Brigham, Eugene F. . Financial Management: Theory & Practice, 13th Edition. South Western Educational Publishing, 03/2010. pp. 551 - 553).
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