Wolvervine Corporation plans - Expert Work

Wolvervine Corporation plans - Expert Work

1. Wolvervine Corporation plans to pay a $3 dividend per share on each of its 300,000 shares next year. Wolvernine anticipates earnings of $6.25 per share over the year. If the company has a capital budget requiring an investment of $4 million over the year and it desires to maintain its present debt to total assets (debt ratio) of 0.40, how much external equity must it raise? Assume that Wolvernine’s capital structure includes only common equity and debt, and that debt and equity will be the only sources of funds to finance capital projects over the year.

2. The Garcia Industries balance sheet and income statement for the year ended 2010 are follows:

Balance Sheet
(In Millions of Dollars)

Assets                                   Liabilies and stockholders’ equity 
            Cash                                $6.0            Accounts payable                                     10.0

           Accounts receivable        14.00           Salaries, benefits,                           2.0

Inventories                        12.0              Other Current liabilities                   10.0         

Fixed assets, net                40.0            Long-term debt                                12.0

                  72.00          Stockholders’ equity              38.0


Income Statement

(In Millions of Dollars)
net sales                                                                             $100.0

Cost of sales                                                             60.0

Selling, general and adm. expenses                          20.0

Other expenses                                                                     15.0


Earnings after tax                                                      $ 5.0

a.     Determine the length of the inventory conversion period.

b.     Determine the length of the receivables conversion period.

c.     Determine the length of the operating cycle.

d.     Determine the length of the operating cycle.

e.     Determine the length of the cash conversion cycle.

f.      What is the meaning of the number you calculated in part e?

3. J-Mart, a nationwide department store chain, processes all its credit sales payment at its suburban Detroit headquarters. The firm is considering the implementation of a lockbox collection system with an Atlanta bank to process monthly payments from its southeastern region. Annual credit sales collections from the region are $60 million. The establishment of the lockbox system would reduce mailing, processing and check-clearing time from 8 days currently to 3.5 days, reduce company processing costs by $25,000 per year, and reduce the compensating balance of its Detroit Bank by 200,000. The Atlanta bank would not charge any fee for the lockbox service but would require j-mart to maintain a $500,000 compensating balance. Funds released by the lockbox arrangement could be invested elsewhere in the firm to earn 15 percent before taxes. Determine the following

a. The amount of funds released by the lockbox arrangement

b. The annual (pretax) earnings on the released funds

c.  The annual net (pretax) benefits to j-mart of establishing the lockbox system with the Atlanta bank. 
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