Problem 16-13 Current Asset Usage Policy

Payne Products' sales last year were an anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various current assets policies on its financial performance. Payne has $1 million of fixed assets and intends to keep its debt ratio at its historical level of 55%. Payne's debt interest rate is currently 8%. You are to evaluate three different current asset policies: (1) a restricted policy in which current assets are 45% of projected sales, (2) a moderate policy with 50% of sales tied up in current assets, and (3) a relaxed policy requiring current assets of 60% of sales. Earnings before interest and taxes is expected to be 10% of sales. Payne's tax rate is 35%.

What is the expected return on equity under each current asset level? Round your answers to two decimal places.

Tight policy_________________%

Moderate policy______________%

Relaxed policy___________%

Problem 16-6 Receivables Investment

Snider Industries sells on terms of 3/10, net 30. Total sales for the year are $1,864,000. Thirty percent of the customers pay on the 10th day and take discounts; the other 70% pay, on average, 54 days after their purchases. Assume 365 days in year for your calculations.

What is the days sales outstanding? Round your answer to one decimal place. ________ days

What is the average amount of receivables? Round your answer to the nearest dollar. ____________$

What would happen to average receivables if Snider toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day? Round your answer to the nearest dollar. _____________$

Problem 17-12 Interest Rate Parity

Assume that interest rate parity holds and that 90-day risk-free securities yield 3% in the United States and 3.3% in Germany. In the spot market, 1 euro equals $1.49 dollar.

Is the 90-day forward rate trading at a premium or discount relative to the spot rate? ___________premiumdiscountItem 1 What is the 90-day forward rate? Round your answer to four decimal places. _____________$