Reference no: EM133151903

Chapter 16

1. Define the cash conversion cycle (CCC) and explain why, holding other things constant, a firm's profitability would increase if it lowered its CCC.

2. What are the two definitions of cash, and why do corporate treasurers often use the second definition?

3. What does it mean to adopt a maturity matching approach to financing assets, including current assets? How would a more aggressive or a more conservative approach differ from the maturity matching approach, and how would each affect expected profits and risk? In general, is one approach better than the others?

Chapter 17

1. PRO FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):

Sales $3,000

Operating costs excluding depreciation 2,450

EBITDA $ 550

Depreciation 250

EBIT $ 300

Interest 125

EBT $ 175

Taxes (40%) 70

Net income $ 105

Looking ahead to the following year, the company's CFO has assembled this information:

Year-end sales are expected to be 10% higher than the $3 billion in sales generated last year.

Year-end operating costs, excluding depreciation, are expected to equal 80% of yearend sales.

Depreciation is expected to increase at the same rate as sales.

Interest costs are expected to remain unchanged.

The tax rate is expected to remain at 40%. On the basis of that information, what will be the forecast for Roberts' year-end net income?

2. LONG-TERM FINANCING NEEDED At year-end 2018, total assets for Arrington Inc. were $1.8 million and accounts payable were $450,000. Sales, which in 2018 were $3.0 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to $500,000 in 2018, and retained earnings were $475,000. Arrington plans to sell new common stock in the amount of $130,000. The firm's profit margin on sales is 5%; 35% of earnings will be retained.

a. What were Arrington's total liabilities in 2018?

b. How much new long-term debt financing will be needed in 2019? (Hint: AFN 2 New stock 5 New long-term debt.)