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Chapter 2: 5DQ (page 75)
Is there any validity in rule-of-thumb ratios for all corporations, such asa current ratio of 2 to 1 or debt to assets of 50 percent?
No rule of thumb is valid for all corporations.
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Mansfield Corporation had 20X1 sales of \(100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:
Percent | |
Cash | 5% |
Accounts receivable | 15 |
Inventory | 20 |
Net fixed assets | 40 |
Accounts payable | 15 |
Accruals | 10 |
Profit margin after tax | 10% |
The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 20X1 was \)33 million. Notes payable are currently \(7 million. Long-term bonds and common stock are constant at \)5 million and $10 million, respectively.
a. How much additional external capital will be required for next year if sales
increase 15 percent? (Assume that the company is already operating at full
capacity.)
Lenow鈥檚 Drug Stores and Hall鈥檚 Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here:
Lenow | Hall | ||
Debt @ 10% | \(100,000 | Debt @ 10% | \)200,000 |
Common stock, \(10 par | 200,000 | Common stock, \)10 par | 100,000 |
Total | \(300,000 | Total | \)300,000 |
Shares | 20,000 | Common shares | 10,000 |
b. Explain the relationship between earnings per share and the level of EBIT.
Watt鈥檚 Lighting Stores made the following sales projection for the next six months. All sales are credit sales.
March | \(35,000 |
April | 41,000 |
May | 30,000 |
June | 39,000 |
July | 47,000 |
August | 49,000 |
Sales in January and February were \)38,000 and $37,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale.
Prepare a monthly cash receipts schedule for the firm for March through
August.
Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is expected to be collected later?
Discuss the limitations of financial leverage.
Classify the following balance sheet items as current or noncurrent:
Retained earning | Bond payable |
Accounts payable | Accrued wages payable |
Prepaid expenses | Accounts receivable |
Plant and equipment | Capital in excess of par |
Inventory | Preferred stock |
Common stock | Marketable security |
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