QUESTION 2 (20 Marks) UNIT 6: WORKING CAPITAL MANAGEMENT/ UNIT 7: FINANCIAL MODELLING

a)GatesIndustries'BalanceSheetandIncomeStatementfortheyearendingDecember31,2014areas

follows:

BalanceSheet($million)

Cash $10.0Accountspayable $15.0

Accountsreceivable 15.0Salaries,benefits,&payrolltaxespayable 3.0

Inventories* 12.0Long-termdebt 15.0

Fixedassets(net)30.0 Stockholders'equity34.0 Totalassets $67.0Totalliab.&stock.equity $67.0

IncomeStatement($million)

Netsales(allcredit) $125.0

Costofsales 75.0

Selling,general,&admin.expenses 30.0

Otherexpenses13.0

Earningsaftertax $7.0

*Note:Averageinventoriesalsoequal$12.0million.

b)TheEssexCompanyfoundthatanaverageof10dayselapsesbetweenthetime

acustomer'spaymentsarereceived andthedepositedfundsclearthecustomer'sbank

andbecomeusablebythefirm.Essex'sannualsalesare$240 million.

(Assume365daysperyearwhenconvertingfromannualdatatodailydataorviceversa.)

Whatisthe increaseinEssex'saveragecashbalance,

assumingitcanreducethetimerequiredtoprocesscustomerpaymentsby 3daysthrough

moreefficientpaymentprocessingmethods?

c)ToolMartsells1,400electronicwaterpumpseveryyear.Thesepumpscost$54.30each.

Ifannualinventorycarrying costsare12%andthecostofplacinganorderis$90,

whatisthefirm'sEOQ?

d)In1998,HeplerCompany'ssaleswere$26millionanditstotalassetswere$10million.Currentliabilitieswere$4 million,andtotalequitywas$2million.

HeplerCompany'ssalesfor1999areforecastedtobe$34million,earnings aftertaxesareexpectedtobe5percentofsales,anddividendsof$800,000areexpectedtobepaid.

Assumingthat theratios"assetstosales"and

"currentliabilitiestosales"in1998remainthesamein1999,determinetheapproximate amountofadditionalfinancingrequired