Debt ratio
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The Sooner Equipment Company has total assets of $100 million. Of this total, $40 million was financed with common equity and $60 million with debt (both long- and short-term). Its average accounts receivable balance $20 million, and this represents an 80-day average collection period. Sooner believes it can reduce its average collection period from 80 days to 60 days without affecting sales or the dollar amount of net income after taxes (currently $5 million). What will be the effect of this action on Sooner's return on investment and its return on stockerholer's equity if the funds received by reducing the average collection period are used to buy back its common stock at book value? What impact will this action have on Sooner's debt ratio?
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Solution Summary
The solution examines the impact that reducing average collection period and using the cash freed to buy back shares will have on the return on investment, return on stockerholer's equity and debt ratio.
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