In fiscal $2010$ and $2011$ Caterpillar's financial statements included the following items. What was

Caterpillar's cash conversion cycle?

When a firm enters into a loan agreement with its bank, it is very common for the agreement to have a

restriction on the minimum current ratio the firm has to maintain. So$,$ it is important that the firm be aware

of the effects of its decisions on the current ratio. Consider the situation of Advance Auto Parts $($AAP$)$ in

The firm had total current assets of $$1,807,626,000$ and total current liabilities of $$1,364,994,000.$

a$.$ What is the firm's current ratio?

b$.$ If the firm were to expand its investment in inventory and finance the expansion by increasing accounts

payable, how much could it increase its inventory without reducing the current ratio below $1\mathrm{.}2?$

c$.$ If the company needed to raise its current ratio to $1\mathrm{.}5$ by simultaneously reducing its investment in current

assets and reducing its accounts payable and short$-$term debt, how much would it have to reduce current

assets to accomplish this goal?

Garson Corp. is looking at two possible capital structures. Currently, the firm is an all$-$equity firm with

$$1\mathrm{.}2$ million dollars in assets and $200,000$ shares outstanding. The market value of each share of stock is

$$6\mathrm{.}00.$ The CEO of Garson is thinking of leveraging the firm by selling $$600,000$ of debt financing and

retiring $100,000$ shares, leaving $100,000$ outstanding. The cost of debt is $10\%$ annually, and the current

corporate tax rate for Garson is $30\%.$ If the CEO believes that Garson will earn $$100,000$ per year before

interest and taxes, should she leverage the firm? Explain.

David Ding Baseball Bat Company currently has $$3$ million in debt outstanding, bearing an interest rate

of $12$ percent. It wishes to finance a $$4$ million expansion program and is considering three alternatives:

additional debt at $14$ percent interest $($option $1),$ preferred stock with a $12$ percent dividend $($option $2),$ and

the sale of common stock at $$16$ per share $($option $3).$ The company currently has $800,000$ shares of common

stock outstanding and is in a $40$ percent tax bracket.

a$)$ If earnings before interest and taxes are currently $$1\mathrm{.}5$ million, what would be earnings per share for the

three alternatives, assuming no immediate increase in operating profit?

b$)$ Mathematically determine the indifference point between the debt plan and the common stock plan.

In a world without taxes or transaction costs, it can be argued that dividend policy is irrelevant for

shareholder value and cash flow. With a no$-$dividend policy, the current price is and will remain $$100\mathrm{.}00$

per share. With a high$-$dividend policy, the current price is $$100\mathrm{.}00$ per share and the value falls to $$95$

per share upon payment of the dividend.

Use the following example to demonstrate dividend policy irrelevance.