Assets Liabilities and Equity Cash Accounts receivable Inventory Fixed assets To
ID: 2813624 • Letter: A
Question
Assets Liabilities and Equity Cash Accounts receivable Inventory Fixed assets Total assets $50,000 $375,000 $510,000 $925,000 $1,860,000 Accounts payable Accrued expenses Notes payable Current maturity of long-term debt Long-term debt Equity Total liabilities and equity $166,000 37,000 $75,000 $25,000 $475,000 $1,082,000 $1,860,000 Sales: $4,622,800 Cost of goods sold: $3,504,100 Operating expenses: $893,000 Purchases: $3,116,000 1. What fraction of the firm's current assets is (implicitly) being funded with long-term debt or equity? What is the significance if this figure is large versus small? 2. Assuming a 365-day year, calculate the firm's asset cash-to-cash cycle, liability cash- to-cash cycle, and days deficiency. Using this information and the procedure described in the text, estimate the firm's working capital loan needs. 3. What general concerns might you have regarding this loan request? 4. Suppose that the typical publishing firm in this industry has just one-half the amount of equity that RSM has. How will this affect key industry ratios and the working cap- ital needs estimated by this procedure, in general?Explanation / Answer
1.
This is found by calculating the working capital. Working capital is the excess current assets above current liability , so if there is positive working capital , that means that portion is funded by long term liabilities and equity.
Working capital = Current Assets - Current Liabilities
= (Cash + a/c receivables +inventory) - (A/c payable+accrued expenses+notes payable)
= (50000+375000+510000) - (166000+37000+75000)
= 657000
This is funded by long term funds.
Current maturity of LTD not included as it is also part of long term debt.
High WC means the company has enough current assets to meet the short term obligation. So a higher number is good from a credit point of view. But still if the number is too high, that can also mean that certain inventories and receivables may not be collectable. So a number on par with industry standards are better.
2.
Asset cash to cash cycle = days of sales outstanding + Days of Inventory outstanding
= (a/c receivables/ Avg sales per day) + ( Inventory / Average cost of Goods sold per day)
= (375000 / (4622800 / 365)) + ( 510000 / ( 3504100 / 365))
= 29.61 + 53.12
= 82.73
Liability cash to cash cycle = Days of purchases outstanding
= A/c payables / Average purchases per day
= 166000/ ( 3116000 / 365 )
= 19.44
Days Deficiency = Cash conversion cycle = 82.73 - 19.44
= 63.29
The company takes 63.29 days to convert purchases into cash flows. . The company would need working capital loan to fund this gap.
3.
Loan request amount is not given in the question. Compare the amount of loan request with the calculated working capital.If that is less than the working capital of 657000 , then loan can be extended. Also need to consider the days of sales outstanding and inventory outstanding. If these are significantly greater than the industry average , there is a concern on how reliable the working capital/ current assets is to repay the loan.
4.
Then the industry ratios will have more debt than this company as their equity funding is low. ( assuming that the size of publishing firms are similar) . So it will increase debt to equity ratio of industry. It may reduce working capital as they may rely more on short term funding too. Current ratio/ Working capital ratio also will be reduced.
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