You are considering investing in Dakota’s Security Services. You have been able

Question

You are considering investing in Dakota’s Security Services. You have been able to locate the following information on the firm: Total assets are $33.9 million, accounts receivable are $4.59 million, ACP is 25 days, net income is $4.80 million, and debt-to-equity is 1.2 times. All sales are on credit. Dakota’s is considering loosening its credit policy such that ACP will increase to 30 days. The change is expected to increase credit sales by 5 percent. Any change in accounts receivable will be offset with a change in debt. No other balance sheet changes are expected. Dakota’s profit margin will remain unchanged.

How will this change in accounts receivable policy affect Dakota’s net income, total asset turnover, equity multiplier, ROA, and ROE? (Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 2 decimal places and other answers to 2 decimal places. Use 365 days a year.)

You are considering investing in Dakota’s Security Services. You have been able to locate the following information on the firm: Total assets are $33.9 million, accounts receivable are $4.59 million, ACP is 25 days, net income is $4.80 million, and debt-to-equity is 1.2 times. All sales are on credit. Dakota’s is considering loosening its credit policy such that ACP will increase to 30 days. The change is expected to increase credit sales by 5 percent. Any change in accounts receivable will be offset with a change in debt. No other balance sheet changes are expected. Dakota’s profit margin will remain unchanged.

Explanation / Answer

Calculation of net income:

Net income would be $4.80 million.

Calculation of Total asset turnover ratio:

Total asset turnover ratio:

= Net Sales / Average total assets

= ($4.59 *365 /30*1.05) / $33.90

= $58.64 /$33.90

= 1.73 times

Calculation of Equity multiplier:

= Total assets / Total shareholder’s equity

= $33.90 / ($33.90 /2)*1.2

= $33.90 / $20.34

= 1.67 times

Calculation of Return on Assets (ROA):

= Net income / Average total assets

= $4.80 / $33.90

= 0.1416 times

Calculation of Return on equity:

= Net income / Shareholder’s equity

= $4.80 / $20.34

= 0.24 times.

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