Chapter 3: 3DQ (page 182)
What is the significance to working capital management of matching sales and production?
An organization can keep a minimum level of inventory if the sales and production are matched.This helps in managing the working capital working capital with ease.
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Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.
b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be \)240,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January | \(8,500 |
February | \)2,500 |
March | \(3,500 |
April | \)8,500 |
May | \(9,500 |
June | \)4,500 |
Short-term financing will be utilized for the next six months.
January | 9% |
February | 10% |
March | 13% |
April | 16% |
May | 12% |
June | 12% |
Here are the projected annual interest rates:
a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer, add up the monthly interest payments.
b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.
Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.
a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear’s earnings before interest and taxes are \)240,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent.
b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $240,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.
c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?
Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.
c. What would happen if the short- and long-term rates were reversed?
Why would a financial manager want to slow down disbursements?
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