Finance Class Review

Aziz Industries has sales of X and accounts receivable of Y, and it gives its customers some days to pay. The industry average DSO is Z days, based on a full year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns W% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?

Company DSO= Y/Daily sales(X/year). Take Company DSO and subtract by Z. Take that number and multiply by daily sales. Multiply that number by W. That is the answer.

Heaton Corp. sells on terms that allow customers A days to pay for merchandise. Its sales last year were $B, and its year-end receivables were $C. If its DSO is less than the A-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO - Credit period = days early or late, and use a FULL year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.

A-(C/(B/FULL YEAR))= THE ANSWER

Bonner Corp.'s sales last year were $A, and its year-end total assets were $B. The average firm in the industry has a total assets turnover ratio (TATO) of C. Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

TARGET ASSETS = A/C. ASSET REDUCTION = B-TARGET ASSETS.

Ziebart Corp.'s EBITDA last year was $A (= EBIT + depreciation + amortization), its interest charges were $B, it had to repay $C of long-term debt, and it had to make a payment of $D under a long-term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?

TOTAL FINANCIAL CHARGES= B+C+D. FUNDS AVAIL FOR FIN CHARGES = A+D. EBITDA COVERAGE= FUNDS AVAIL FOR FIN CHARGES/ TOTAL FINANCIAL CHARGES

LeCompte Corp. has $A of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $B, and its net income after taxes was $C. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to D%. What profit margin would LeCompte need in order to achieve the D% ROE, holding everything else constant?

C/A=TARGET ROE. NET INCOME REQ’D TO GET TARGET ROE = D*A. PROFIT MARG. NEEDED TO GET TARGET ROE= NET INCOME REQ’D (D*A) DIVIDED BY B.

Last year Urbana Corp. had $A of assets, $B of sales, $C of net income, and a debt-to-total-assets ratio of D%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net