Homework answers / question archive / Question One) State whether the following statement is true or false (a) A company’s debt/equity ratio is always less than 1 (b) The quick ratio is always less than current ratio (c) The return on equity is always less the return on assets Question Two) If a firm’s assets of $10,000 represents 200 days sales, what is it annual sales

Question One) State whether the following statement is true or false (a) A company’s debt/equity ratio is always less than 1 (b) The quick ratio is always less than current ratio (c) The return on equity is always less the return on assets Question Two) If a firm’s assets of $10,000 represents 200 days sales, what is it annual sales

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Question One)

State whether the following statement is true or false

(a) A company’s debt/equity ratio is always less than 1

(b) The quick ratio is always less than current ratio

(c) The return on equity is always less the return on assets

Question Two)

If a firm’s assets of $10,000 represents 200 days sales, what is it annual sales. What is its assets turnover ratio?

Question Three)

Here are some data for five companies in the same industry.

	A	B	C	D	E
EBIT	10	30	100	-3	80
Interest Expense	5	15	50	2	1

 

You have been asked to calculate a measure of times-interest earned for the industry. Discuss the possible ways that you might calculate such a measure. Does changing the method of calculation make a significant difference to the end result?

Question Four)

Listed below ae some common terms of sale. Can you explain what each term means?

(a) 2/30, net 60

(b) 2/5, EOM, net 30

(c) COD

Question Five)

Jim, the credit manager of VCL Ltd, is reappraising the company’s credit policy. VCL sells on terms of net 30. Cost of goods sold is 85% of sales, and fixed costs are a further 5% of sales. VCL classifies customers on a scale of 1 to 4. During the past five years, the collection experience was as follows:

Classification	Default as Percent of Sales	Average collection Period in Days for Non-defaulting Accounts
1	0	45
2	2.0	42
3	10.0	40
4	20.0	80

 

The interest rate is 15%

• What conclusions (if any) can you draw about VCL’s credit policy?

• What other factors should be taken into account before changing this policy?

Question Six)

In question five, assume that it costs $95 to classify each new credit applicant and that an almost equal proportion of new applicants falls into each of the four categories. In what circumstances should Jim not bother to undertake a credit check?

Question Seven)

Fogle Manufacturing uses 2,590 switch assemblies per week and then reorders another 2,590. If the relevant carrying cost per switch assembly is $5.75 and the fixed order cost is $740, is the company’s inventory policy optimal? Why or why not?

Question eight)

TMD store begins each week with 675 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $67.75 per year and the fixed order cost is $310.

a) What is the total carrying cost?

b) What is the restocking cost?

c) Should the company increase or decrease its order size? Describe an optimal inventory policy for the company in terms of order size and order frequency.

Question nine)

The SS Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 700 bicycles. The average cost to the shop of a bicycle is $650. The owner knows that only 96 percent of the customers will be able to make their payments. To identify the remaining 4 percent, the company is considering subscribing to a credit agency. The initial charge for this service is $950, with an additional charge of $15 per individual report. Should the company subscribe to the agency?

Question Ten)

Tom's Toys is currently experiencing a bad debt ratio of 6 percent. Tom is convinced that, with tighter credit controls, he can reduce this ratio to 2 percent; however, he expects sales to drop by 8 percent as a result. The cost of goods sold is 75 percent of the selling price. Per $100 of current sales, what is Tom's expected profit under the proposed credit standards?

Question Eleven)

Terry's Place is currently experiencing a bad debt ratio of 4 percent. Terry is convinced that, with looser credit controls, this ratio will increase to 8 percent; however, she expects sales to increase by 10 percent as a result. The cost of goods sold is 80 percent of the selling price. Per $100 of current sales, what is Terry's expected profit under the proposed credit standards?

 

Question Twelve)

A customer has ordered goods generating a present value of $2,400. The present value of production costs is $1600. Under what conditions should you extend credit if there is no possibility of repeat orders?