Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of $7 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Pasha allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days. a. What is the length of Pasha’s cash conversion cycle? b. At a steady state in which Pasha produces 1,400 batteries a day, what amount of working capital must it finance? c. By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 33 days? d. Pasha’s management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Pasha to decrease its inventory conversion period to 17 days and to increase its daily production to 2,400 batteries. However, the new process would cause the cost of materials and labor to increase to$12. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?

Answer the following.

Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of 7 dollars per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Pasha allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days.

a. What is the length of Pasha's cash conversion cycle?

b. At a steady state in which Pasha produces 1,400 batteries a day, what amount of working capital must it finance?

c. By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 33 days?

d. Pasha's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Pasha to decrease its inventory conversion period to 17 days and to increase its daily production to 2,400 batteries. However, the new process would cause the cost of materials and labor to increase to 12 dollars. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total$1 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz’s interest rate is currently 8% on both short- and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the federal-plus-state tax rate is 40%. a. What is the expected return on equity under each current assets level? b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? Why or why not? c. How would the firm’s risk be affected by the different policies?

Leyton Lumber Company has sales of $12 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are$1.5 million. What is Leyton’s DSO, what would it be if all customers paid on time, and how much capital would be released if Leyton could take action that led to on-time payments?

Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017.

$$\begin{matrix} \text{May 2016} & \text{\$ 180.000}\\ \text{June} & \text{180.000}\\ \text{July} & \text{360.000}\\ \text{August} & \text{540.000}\\ \text{September} & \text{720.000}\\ \text{October} & \text{360.000}\\ \text{November} & \text{360.000}\\ \text{December} & \text{90.000}\\ \text{January 2017} & \text{180.000}\\ \end{matrix}$$

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

$$\begin{matrix} \text{May 2016} & \text{\$ 90.000}\\ \text{June} & \text{90.000}\\ \text{July} & \text{126.000}\\ \text{August} & \text{882.000}\\ \text{September} & \text{306.000}\\ \text{October} & \text{234.000}\\ \text{November} & \text{162.000}\\ \text{December} & \text{90.000}\\ \end{matrix}$$

General and administrative salaries are approximately $27,000 a month. Lease payments under long-term leases are$9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are$2,700 a month. Income tax payments of $63,000 are due in September and December. A progress payment of$180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of$90,000 should be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2016. b. Prepare monthly estimates of the required financing or excess funds—that is, the amount of money Bowers will need to borrow or will have available to invest. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects. d. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.

Zane Corporation has an inventory conversion period of 64 days, an average collection period of 28 days, and a payables deferral period of 41 days. a. What is the length of the cash conversion cycle? b. If Zane’s annual sales are $2,578,235 and all sales are on credit, what is the investment in accounts receivable? c. How many times per year does Zane turn over its inventory? Assume that the cost of goods sold is 75% of sales. Use sales in the numerator to calculate the turnover ratio.

Parramore Corp has $12 million of sales,$3 million of inventories, $3.25 million of receivables, and$1.25 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 8% rate. What is Parramore’s cash conversion cycle (CCC)? If Parramore could lower its inventories and receivables by 10% each and increase its payables by 10%, all without affecting sales or cost of goods sold, what would be the new CCC, how much cash would be freed up, and how would that affect pretax profits?

Prestopino Corporation produces motorcycle batteries. Prestopino turns out $1,500$ batteries a day at a cost of $\$ 6$ per battery for materials and labor. It takes the firm $22$ days to convert raw materials into a battery. Prestopino allows its customers $40$ days in which to pay for the batteries, and the firm generally pays its suppliers in $30$ days.

a. What is the length of Prestopino's cash conversion cycle?

b. At a steady state in which Prestopino produces $1,500$ batteries a day, what amount of working capital must it finance?

c. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to $35$ days?

d. Prestopino's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to $20$ days and to increase its daily production to $1,800$ batteries. However, the new process would cause the cost of materials and labor to increase to $\$ 7$. Assuming the change does not affect the average collection period ( $40$ days) or the payables deferral period ( $30$ days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?

What does it mean to adopt a maturity matching approach to financing assets, including current assets? How would a more aggressive or a more conservative approach differ from the maturity matching approach, and how would each affect expected profits and risk? In general, is one approach better than the others?

After a $5$-for-$1$ stock split, Strasburg Company paid a dividend of $\$ 0.75$ per new share, which represents a $9 \%$ increase over last year's pre-split dividend. What was last year's dividend per share?

Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a $3.00 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 60% equity and 40% debt, it has 1,000,000 shares of common equity outstanding, and its net income is$8 million. The company forecasts that it will require $10 million to fund all of its profitable (i.e., positive NPV) projects for the upcoming year. a. If Buena Terra follows the residual dividend model, how much retained earnings will it need to fund its capital budget? b. If Buena Terra follows the residual dividend model, what will be the company’s dividend per share and payout ratio for the upcoming year? c. If Buena Terra maintains its current$3.00 DPS for next year, how much retained earnings will be available for the firm’s capital budget? d. Can the company maintain its current capital structure, the $3.00 DPS, and a$10 million capital budget without having to raise new common stock? e. Suppose that Buena Terra’s management is firmly opposed to cutting the dividend; that is, it wants to maintain the $3.00 dividend for the next year. Also, assume that the company was committed to funding all profitable projects and was willing to issue more debt (along with the available retained earnings) to help finance the company’s capital budget. Assume that the resulting change in capital structure has a minimal effect on the company’s composite cost of capital so that the capital budget remains at$10 million. What portion of this year’s capital budget would have to be financed with debt? f. Suppose once again that Buena Terra’s management wants to maintain the $3.00 DPS. In addition, the company wants to maintain its target capital structure (60% equity and 40% debt) and its$10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue to meet each of its objectives? g. Now consider the case where Buena Terra’s management wants to maintain the $3.00 DPS and its target capital structure, but it wants to avoid issuing new common stock. The company is willing to cut its capital budget to meet its other objectives. Assuming that the company’s projects are divisible, what will be the company’s capital budget for the next year? h. What actions can a firm that follows the residual dividend model take when its forecasted retained earnings are less than the retained earnings required to fund its capital budget?

Karleen’s Catering Service provides catered meals to individuals and businesses. Karleen’s purchases its food ready to serve from Mel’s Restaurant. In order to prepare a realistic trial balance, the events described below are aggregations of many individual events during 2019.

a. Common stock was issued for $22,000.

b. During the year, Karleen’s paid office rent of$13,500.

c. Utilities expenses incurred and paid were $5,320.

d. Wages of$58,800 were earned by employees and paid during the year.

e. During the year, Karleen’s provided catering services:

On credit, $128,200 For cash, 18,650

f. Karleen’s paid$59,110 for supplies purchased and used during the year.

g. Karleen’s paid dividends in the amount of $3,500.

h. Karleen’s collected accounts receivable in the amount of$109,400.

Required:

1. Analyze the events for their effect on the accounting equation.

2. Prepare journal entries. (Note: Ignore the date because these events are aggregations of individual events.)

3. Post the journal entries to the appropriate T-accounts.

4. Prepare a trial balance at December 31, 2019. Assume that all beginning account balances at January 1, 2019, are zero.

Indicate using a (+), (–), or (0) whether each of the following events would probably cause accounts receivable (A/R), sales, and profits to increase, decrease, or be affected in an indeterminate manner:

$$\begin{matrix} \text{ } & \text{A/R} & \text{Sales} & \text{Profits}\\ \text{The firm restricts its credit standards.}\\ \text{The terms of trade are changed from 2/10, net 30, to 3/10, net 30.}\\ \text{The terms are changed from 1/20, net 30, to 3/10, net 40.}\\ \text{The credit manager gets tough with past-due accounts.}\\ \end{matrix}$$

Walsh Company is considering three independent projects, each of which requires a $4 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here:$ $$ \begin{matrix} \text{Project H (high risk):} & \text{Cost of capital =16\\%} & \text{IRR=19\\%}\\ \text{Project M (medium risk):} & \text{Cost of capital =12\\%} & \text{IRR=13\\%}\\ \text{Project L(low risk):} & \text{Cost of capital =9\\%} & \text{IRR=8\\%}\\ \end{matrix} $$ $Note that the projects’ costs of capital vary because the projects have different levels of risk. The company’s optimal capital structure calls for 40% debt and 60% common equity, and it expects to have net income of$7,500,000. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio?