Calculating Cash Collections

1. Cash Equation. Stabbing Westward Company has a book net worth of $21,000. Long-term debt is $5,000. Net working capital, other than cash, is $8,500. Fixed assets are $8,000. How much cash does the company have? If current liabilities are $4,000, what are current assets?

2. Calculating Cash Collections. The following is the sales budget for Golden Parachute, Inc., for the first quarter of 2003:

Month
January
February
March

Sales Budget
$120,000
$160,000
$180,000

Credit sales are collected as follows:

65 percent in the month of the sale

20 percent in the month after the sale

15 percent in the second month after the sale

The accounts receivable balance at the end of the previous quarter was $50,000 ($28,000 of which was uncollected December sales).

a. Compute the sales for November.

b. Compute the sales for December.

c. Compute the cash collections from sales for each month from January through March.

3. Describe the different instruments that make up a company’s capital structure. Discuss the advantages and disadvantages of each.

4. Compute the present value of a $100 cash flow for the following combinations of discount rates and times:

a. r = 8 percent. t = 10 years.

b. r = 8 percent. t = 20 years.

c. r = 4 percent. t = 10 years.

d. r = 4 percent. t = 20 years.

5. Would you rather receive $1,000 a year for 10 years or $800 a year for 15 years if:

a. the interest rate is 5 percent?

b. the interest rate is 20 percent?

c. Why do your answers to (a) and (b) differ?

6. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. Is this project worth pursuing if the discount rate is 10 percent? How high can the discount rate be before you would reject the project?

7. True or false? If false, correct the statement.

a. A company may not generally pay a dividend out of legal capital.

b. A company may not generally pay a dividend if it is insolvent.

c. The effective tax rate on capital gains can be less than the stated tax rate on such gains.

d. Corporations are not taxed on dividends received from other corporations.

8. Calculating Float. You have $200,000 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $118,000. Does this create a disbursement float or a collection float? What is your available balance? Book balance?

9. Calculating Net Float. Each business day, on average, a company writes checks totaling $43,000 to pay its suppliers. The usual clearing time for the checks is five days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $57,000. The cash from the payments is available to the firm after two days.

a. Calculate the company’s disbursement float, collection float, and net float.

b. How would your answer to part (a) change if the collected funds were available in one day instead of two?

10. A stock sells for $40. The next dividend will be $4 per share. If the rate of return earned on reinvested funds is 15 percent and the company reinvests 40 percent of earnings in the firm, what must be the discount rate?

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