Reference no: EM132962512

Questions -

Q1. Caltrate Company follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?

Q2. The financial manager of Judy Company wants to determine the amount of cash outlays to be spent for the next period. He asked the help of the accountant and the latter provided a cash budget for the next year. According to the computations, the company would be incurring cash expenses of $6,612,500 per month. The financial manager has estimated a cost of $40 per transaction in case non-cash asset is converted to cash. The firm's opportunity cost ratio is 12%.

a. How much is the optimum cash balance?

b. How much is the average cash balance?

c. What is the number of conversion made during the year?

d. What is the total cash cost?

Q3. TNT Company is evaluating the extension of credit to a new group of customers. Although these customers will provide $240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur $21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment.

a. Should TNT Company extend credit to these customers?

b. Should credit be extended if the receivables turnover drops to 1.5 and all other factors are the same?