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Payne Products had $1
Payne Products had $1.6 million in sales revenues in the most recent year and expects sales growth to be 25% this year. Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 60%. Payne's debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes are expected to be 12% of sales. Payne's tax rate is 40%.
b. In this problem, we have assumed that the level of expected sales is independent of current asset policy. Is this a valid assumption? Why or why not?
Expert Solution
No, this is not be valid in a real world world situation. A corporation's assets strategies with deference to accounts receivable may have valuable impact on sales. Account receivable such as discounts, collection period and collection policy. The accurate kind of this purpose may be hard to quantify, however, and characterizing an optimal current asset level may not be possible in matter of fact.
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