Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $4,400,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.
What's the difference in the projected ROEs under the restricted and relaxed policies? Do not round intermediate calculations.
2. Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $650,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)
3. Romano Inc. has the following data. What is the firm's cash conversion cycle?
| Inventory Conversion Period = | 38 days |
| Receivables Collection Period = | 19 days |
| Payables Deferral Period = | 38 days |
4. Clayton Industries is planning its operations for next year. Khalid Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Do not round intermediate calculations.
| Last year's sales = S0 | $520 | | Last yr's accounts payable | $40 |
| Sales growth rate = g | 40% | | Last yr's notes payable | $70 |
| Last year's total assets = A0 | $540 | | Last yr's accruals | $35 |
| Last year's prof margin = PM | 15% | | Target payout ratio | 60% |
5. Last year Godinho Corp. had $350.0 million of sales, and it had $75.0 million of fixed assets that were being operated at 70% of capacity. In millions, how large could sales have been if the company had operated at full capacity?
