Assume that, on average, the brothers expect annual sales of 10,000 items at an average price of $100 per item. (Use a 365-day year.)

(1) What is the firm's expected days sales outstanding (DSO)?

(2) What is its expected average daily sales (ADS)?

(3) What is its expected average accounts receivable level?

(4) Assume the firm's profit margin is 25%. How much of the receivables balance must be financed? What would the firm's balance sheet figures be for accounts receivable, notes payable, and retained earning at the end of 1 year if notes payable are used to finance the investment in receivables? Assume the cost of carrying receivables had been deducted when the 25% profit margin was calculated.

(5) If bank loans have a cost of 12%, what is the annual dollar cost of carrying the receivables?

Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with his brother, Jim, who majored in building construction. The firm would sell primarily to general contractors, and it would start operating next January. Sales would be slow during the cold months, rise during the spring, and then fall off again in the summer, when new construction in the area slows. Sales estimates for the first 6 months are as follows (in thousands of dollars):

The terms of sales are net 30, but because of special incentives, the brothers expect 30% of the customers (by dollar value) to pay on the 10th day following the sale, 50% to pay on the 40th day, and the remaining 20% to pay on the 70th day. No bad debt losses are expected because Jim, the building construction expert, knows which contractors are having financialproblems.

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ayS200 100 $100 arch S300 Mav January February April 300 June 200