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Impact of change in credit policy on the debt ratio.
Collins Company had the following partial balance sheet and complete income statement information for 1998:
Partial Balance Sheet:
Cash
$ 20
A/R
1,000
Inventories
2,000
Total current assets
$ 3,020
Net fixed assets
2,980
Total assets
$ 6,000
Income Statement:
Sales
$10,000
Cost of goods sold
9,200
EBIT
$ 800
Interest (10%)
400
EBT
$ 400
Taxes (40%)
160
Net Income
$ 240
The industry average DSO is 30 (360-day year). Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10 percent interest rate), what will Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet?
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