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Key Financial Management Concepts and External Financing

A.
Required External Financing. Executive Fruit's financial manager believes that sales in 2003
could rise by as much as 20 percent or by as little as 5 percent.
a. Recalculate the first-stage pro forma financial statements (Table 18-5) under these two assumptions.
How does the rate of growth in revenues affect the firm's need for external
funds?

b. Assume any required external funds will be raised by issuing long-term debt and that any
surplus funds will be used to retire such debt. Prepare the completed (second-stage) proforma balance sheet. In the second-stage proforma, you should account for the impact of interest payments on debt raised at the beginning of the year.

b.

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.

c.

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?

d.
Credit Analysis. Financial ratios were described in Chapter 17. If you were the credit manager,
to which financial ratios would you pay most attention?
Ratios from chapter 17
? Leverage ratios show how heavily the company is in debt.
? Liquidity ratios measure how easily the firm can lay its hands on cash.
? Efficiency or turnover ratios measure how productively the firm is using its assets.
? Profitability ratios are used to measure the firm's return on its investments.
I have attached a file with the questions I'm asking for help on. I'm trying to work out the solutions but I'm stuck on a few. PLEASE HELP!!

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a. Recalculate the first-stage proforma financial statements

BY SALES growth RETAINED EARNINGS HAS INCREASED but also the working capital and other assets
For external fund calculation see proforma balance sheet.

b. Assume any required external funds will be raised by issuing long-term debt and that any
surplus funds will be used to retire such debt. Prepare the completed (second-stage) proforma balance sheet.
In the second-stage proforma, you should account for the impact of interest payments on debt raised at the beginning of the year.

Q-b

a. Paying out a $2 million cash dividend.
It will lengthen the cash conversion cycle as it involves the cash outflow.
No effect on net working capital as there is equal reduction in current liability and current asset.

b. A customer paying a $2,500 bill resulting from a previous sale.
It will ...

Solution Summary

This explains the concepts such as external financing, cash conversion cycle, lock box, working capital management through case studies.

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