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Costs of financial Distress. Let"s go back to the Double-R Nutting Company. Suppose that Double-R"s bonds have a face value of $50. Its current market-value balance sheet is Assets Liabilities and Equity Net working capital $20 Bonds outstanding $25 Fixed assets 10 Common stock 5 Total assets $30 Total liabilities and shareholders' equity $30 Who would gain or lose from the following manoeuvres?
a. Double-R pays a $ 10 cash dividend.
b. Double-R halts operations, sells its fixed assets for $6, and converts net working-capital into $20 cash. It invests its $26 in Treasury bills.
c. Double-R encounters an investment opportunity requiring a $10 initial investment with NPV = SO, it borrows $10 to finance the project by issuing more bonds with the same security, seniority, and so on, as the existing bonds.
On average your firm sells $26500 of items on credit each day. Your average operating cycle is 51 days and your firm acquires and sells inventory on average every 19 days. What is your average accounts receivable balance?
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