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Finance: effects of changes for Dynamic Mattress Company

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I need help with problem 3. Please see attachments.

3. Which items in Table 31.8 would be affected by the following events?

a. There is a rise in interest rates.
b. Suppliers demand interest for late payment.
c. Dynamic receives an unexpected bill in the third quarter from the Internal Revenue
Service for underpayment of taxes in previous years.

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3. Which items in Table 31.8 would be affected by the following events?

a. There is a rise in interest rates.
Ans: Interest payments on bank ...

Solution Summary

Answers the three questions about effects of changes for Dynamic Mattress Company

See Also This Related BrainMass Solution

Fundamentals of Corporate Finance: Planners Peanuts, Dynamic Mattress, Cash Conversion Cycle, Lock Boxes

Please answer the six questions in the attached document. Thank you.

1. Percentage of Sales Models. Here are the abbreviated financial statements for Planners Peanuts:

Sales $2,000
Cost 1,500
Net income $500

2002 2003 2002 2003
Assets $2,500 $3,000 Debt $833 $1,000
Equity 1,667 2,000
Total $2,500 $3,000 Total $2,500 $3,000

If sales increase by 20 percent in 2004, and the company uses a strict percentage of sales planning model (meaning that all items on the income and balance sheet also increase by 20 percent), what must be the balancing item? What will be its value?

2. Working Capital Management. Indicate how each of the following six different transactions
that Dynamic Mattress might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.

3. Cash Conversion Cycle. What effect will the following events have on the cash conversion

a. Higher financing rates induce the firm to reduce its level of inventory.
b. The firm obtains a new line of credit that enables it to avoid stretching payables to its suppliers.
c. The firm factors its accounts receivable.
d. A recession occurs, and the firm's customers increasingly stretch their payables.

4. Lock Boxes. Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes
with an average payment size of $2,000. The bank's charge for operating the lock boxes is $.40
a check. The interest rate is .015 percent per day.
a. If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?
b. What minimum reduction in the time to collect and process each check is needed to justify
use of the lock-box system?

5. Trade Credit Rates. A firm currently offers terms of sale of 3/20, net 40. What effect will the
following actions have on the implicit interest rate charged to customers that pass up the cash
discount? State whether the implicit interest rate will increase or decrease.

a. The terms are changed to 4/20, net 40.
b. The terms are changed to 3/30, net 40.
c. The terms are changed to 3/20, net 30.

6. If you were a credit manager, to which financial ratios would you pay most attention?

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