The Anderson Corporation (an all-equity-financed firm) has a sales level of $280,000 with a 10 percent profit margin before

int
To generate this sales volume, the firm maintains a fixed-asset investment of $100,000.
Currently, the firm maintains $50,000 in current assets.

Sales $ 280,000
Profit margin before interest and taxes 10%
Fixed assets $ 100,000
Current assets $ 50,000

a. Determine the total asset turnover for the firm and compute the rate of return on total assets before taxes.

Total Asset Turnover=(Sales/Assets)

Sales $ 280,000
Assets $ 150,000
Total asset turnover 1.87

b. Compute the before-tax rate of return on assets at different levels of current assets starting with $10,000 and increasing in

Before-tax rate of return on assets

Net profit=(Profit margin X Sales)

Sales $ 280,000
Before tax Profit margin 10%
Before tax Net Profit (EBIT) $ 28,000

Before-tax ROA=(EBIT/Assets)

EBIT $ 28,000
Assets $ 150,000
Before-tax ROA 0.19

EBIT Fixed assets Current Assets Total Assets

$ 28,000 $ 100,000 $ 10,000.00 $ 110,000.00
$ 28,000 $ 100,000 $ 25,000.00 $ 125,000.00
$ 28,000 $ 100,000 $ 40,000.00 $ 140,000.00
$ 28,000 $ 100,000 $ 55,000.00 $ 155,000.00
$ 28,000 $ 100,000 $ 70,000.00 $ 170,000.00
$ 28,000 $ 100,000 $ 85,000.00 $ 185,000.00
$ 28,000 $ 100,000 $ 100,000.00 $ 200,000.00

c. What implicit assumption is being made about sales in Part (b)?

Appraise the significance of this assumption along with the policy to choose the level of current assets that will maximize the r
with a 10 percent profit margin before interest and taxes.

otal assets before taxes.

starting with $10,000 and increasing in $15,000 increments to $100,000.

Before-tax ROA
25.45%
22.40%
20.00%
18.06%
16.47%
15.14%
14.00%

of current assets that will maximize the return on total assets as computed in Part (b).
The Malkiel Corporation has made the three-year projection of its asset investment given in the following table.
It has found that payables and accruals tend to equal onethird of current assets.
It currently has $50 million in equity, and the remainder of its financing is provided by long-term debt.
The earnings retained amount to $1 million per quarter.

Date Fixed Assets (in millions) Current Assets (in millions)

3/31/X1 (now) $ 50 $ 21
6/30/X1 $ 51 $ 30
9/30/X1 $ 52 $ 25
12/31/X1 $ 53 $ 21
3/31/X2 $ 54 $ 22
6/30/X2 $ 55 $ 31
9/30/X2 $ 56 $ 26
12/31/X2 $ 57 $ 22
3/31/X3 $ 58 $ 23
6/30/X3 $ 59 $ 32
9/30/X3 $ 60 $ 27
12/31/X3 $ 61 $ 23

a. Graph the time path of (i) fixed assets and (ii) total assets (less amount financed spontaneously by payables and accruals).

Date Fixed Assets (in millions) Current Assets (in millions) Payables and accruals
3/31/X1 (now) $ 50 $ 21 $ 7.000
6/30/X1 $ 51 $ 30 $ 10.000
9/30/X1 $ 52 $ 25 $ 8.333
12/31/X1 $ 53 $ 21 $ 7.000
3/31/X2 $ 54 $ 22 $ 7.333
6/30/X2 $ 55 $ 31 $ 10.333
9/30/X2 $ 56 $ 26 $ 8.667
12/31/X2 $ 57 $ 22 $ 7.333
3/31/X3 $ 58 $ 23 $ 7.667
6/30/X3 $ 59 $ 32 $ 10.667
9/30/X3 $ 60 $ 27 $ 9.000
12/31/X3 $ 61 $ 23 $ 7.667

b. Devise a financing plan, assuming that your objective is to use a hedging (maturity matching) approach.
owing table.

payables and accruals).

Chart Title
Total Assets (in millions)
$90
$ 64.000
$80
$ 71.000
$70
$ 68.667 $60
$ 67.000 $50
$ 68.667 $40
$ 75.667 $30
$ 73.333 $20
$ 71.667 $10
$-
$ 73.333 3/31/ 6/30/ 9/30/ 12/31/ 3/31/ 6/30/ 9/30/ 12/31/ 3/31/ 6/30/ 9/30/ 12/31/
$ 80.333 X1 X1 X1 X1 X2 X2 X2 X2 X3 X3 X3 X3
(now)
$ 78.000
$ 76.333 Fixed Assets (in millions) Total Assets (in millions)
1/ 6/30/ 9/30/ 12/31/
X3 X3 X3

n millions)
Mendez Metal Specialties, Inc., has a seasonal pattern to its business.
It borrows under a line of credit from Central Bank at 1 percent over prime.
Its total asset requirements now (at year end) and estimated requirements for the coming year are (in millions):

Now Quarter 1 Quarter 2 Quarter 3 Quarter 4

Total asset requirements $ 4.50 $ 4.80 $ 5.50 $ 5.90 $ 5.00

Assume that these requirements are level throughout the quarter.

At present the company has $4.5 million in equity capital plus long-term debt plus the permanent component of current liabil
The prime rate currently is 11 percent, and the company expects no change in this rate for the next year.
Mendez Metal Specialties is also considering issuing intermediate-term debt at an interest rate of 13.5 percent.
In this regard, three alternative amounts are under consideration: zero, $500,000, and $1 million.
All additional funds requirements will be borrowed under the company’s bank line of credit.

a. Determine the total dollar borrowing costs for short- and intermediate-term debt under each of the three alternatives for th
(Assume that there are no changes in current liabilities other than borrowings.) Which alternative is lowest in cost?

b. Is there a consideration other than expected cost that deserves our attention?
re (in millions):

t component of current liabilities, and this amount will remain constant throughout the year.

13.5 percent.

of the three alternatives for the coming year.

e is lowest in cost?