Group 4:

● Anissa Dian Setyarani Wokas (20/470892/PEK/26619)

● Firza Syafira (20/470938/PEK/26665)
● Puspita Ramadhania (20/471001/PEK/26728)
● Raveena Fiarani (20/471005/PEK/26732)

Assignment 8

16-12 The Christie Corporation is trying to determine the effect of its inventory
turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Christie’s
sales last year (all on credit) were $150,000, and it earned a net profit of 6%, or
$9,000. It turned over its inventory 7.5 times during the year, and its DSO was
36.5 days. Its annual cost of goods sold was $121,667. The firm had fixed assets
totaling $35,000. Christie’s payables deferral period is 40 days.
a. Calculate Christie’s cash conversion cycle.

Cash conversion cycle is the time period or the length of the time that a
company takes to convert its investments and other inputs in to cash. It is
obtained using the following formula:

CCC = (Inventory conversion period) + (Average collection period) –

(Payables deferral period)

Total asset turnover ratio is the ratio of a company’s revenue on its assets. This
shows the efficiency of a firm in utilizing its resources. ROA measures the
profitability of a particular firm in relation to its total assets.

Calculate the cash conversion cycle:

 Therefore, the cash conversion cycle is 56.5 days

b. Assuming Christie holds negligible amounts of cash and marketable

securities, calculate its total assets turnover and ROA.
Calculate total asset turnover:

Therefore, the total assets turnover is 2.14

Therefore, ROA is 12.84%

c. Suppose Christie’s managers believe the annual inventory turnover can

be raised to 9 times without affecting sales. What would Christie’s cash
conversion cycle, total assets turnover, and ROA have been if the
inventory turnover had been 9 for the year?
 Therefore, the cash conversion cycle is 46.5 days.

Therefore, the total assets turnover is 2.25

Therefore, ROA is 13.50%

16-13 The Rentz Corporation is attempting to determine the optimal level of current
assets for the coming year. Management expects sales to increase to approximately
$2 million as a result of an asset expansion presently being undertaken. Fixed
assets total $1 million, and the firm wishes to maintain a 60% debt ratio. Rentz’s
interest cost is currently 8% on both short-term, and longer-term debt (both of
which the firm uses in its permanent capital structure). Three alternatives
regarding the projected current asset level are available to the firm: (1) a tight
policy requiring current assets of only 45% of projected sales, (2) a moderate
policy of 50% sales in current assets, and (3) a relaxed policy requiring current
assets of 60% of sales.
 The firm expects to generate earnings before interest and taxes at a rate of 12% on
total sales.

A. What is the expected return on equity under each current asset level?

B. In this problem, we have assumed that the level of expected sales is independent
of current asset policy. Is this a valid assumption? Why or why not?
This assumption is not valid since the level of expected sales is not only dependent on
current asset policies, but also to discounts, collection policy, and account receivable
policies. If the policies don’t match with the customers’ expectation, the expected
sales may be dropped. Therefore, these policies have to be balanced to create the
optimum level of sales.

C. How would the overall risk of the firm vary under each policy?
The three current asset policies have their own level of risk. Firstly, if the firm decides
to go with the tight policy, which is holding the current assets at 45% of sales, it will
be more risky for the company since holding only a small amount of assets may lead
to customer dissatisfaction. Secondly, if the firm is more conservative, in terms of
risks, they may want to go with the moderate and relaxed policies. However, holding
to relatively a greater amount of assets will cost the company more.
16-14 Dorothy Koehl recently leased space in the Southside Mall and opened a new
business, Koehl’s Doll Shop. Business has been good, but Koehl frequently runs
out of cash. This has necessitated late payment on certain orders, which is
beginning to cause a problem with suppliers. Koehl plans to borrow from the
bank to have cash ready as needed, but first she needs a forecast of how much
she should borrow. Accordingly, she has asked you to prepare a cash budget for
the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl’s purchases must be paid for during
the following month. Koehl pays herself a salary of $4,000 per month, and the
rent is $2,000 per month. In addition, she must make a tax payment of $12,000 in
December. The current cash on hand (on December 1) is $400, but Koehl has
agreed to maintain an average bank balance of $6,000—this is her target cash
balance. (Disregard the amount in the cash register, which is insignificant
because Koehl keeps only a small amount on hand in order to lessen the chances
of robbery.)

The estimated sales and purchases for December, January, and February are
shown below. Purchases during November amounted to $140,000.

Sales Purchases

December $160,000 $40,000

January 40,000 40,000

February 60,000 40,000

a. Prepare a cash budget for December, January, and February.

We are using excel to calculate the budget.

b. Suppose that Koehl starts selling on a credit basis on December 1, giving
customers 30 days to pay. All customers accept these terms, and all other facts in
the problem are unchanged. What would the company’s loan requirements be at
the end of December in this case? (Hint: The calculations required to answer this
part are minimal.)

We are using excel to calculate the loan requirements.

The loan requirement is -$163,600.

(17-9) You are the vice president of International InfoXchange, headquartered in
Chicago. All shareholders of the firm live in the United States. Earlier this month, you
obtained a loan of 5 million Canadian dollars from a bank in Toronto to finance the
construction of a new plant in Montreal. At the time the loan was received, the exchange
rate was 75 U.S. cents to the Canadian dollar. By the end of the month, it has
unexpectedly dropped to 70 cents. Has your company made a gain or loss as a result,
and by how much?

We took a loan of 5,000,000 Canadian dollar

= 5,000,000 x 0.75 = $3,750,000 US dollar

We still owe the bank in Canadian dollars.

At the end of month our loan of 5,000,000 Canadian dollars

= 5,000,000 x 0.70 = $3,500,000 US dollars

Thus, our company has made a profit of 3,750,000 - 3,500,000 = $250,000 US dollars

(17-11) Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1
million francs at today’s spot rate. The firm’s financial manager, James Desreumaux,
has noted the following current spot and forward rates:

On the same day, Desreumaux agreed to purchase 15,000 more watches in 3 months at
the same price of 1 million francs.
a. What is the price of the watches, in U.S. dollars, if purchased at today’s spot
rate?
Answer:
The purchase price of 15.000 S watches is 1.000.000 francs.
 The spot rate for S F per USD is 0,6028.
Cost of 15.000 watches in USD if it is purchased at today’s spot rate will be
calculated by dividing total purchase price by spot rate of S F per USD.
1.000.000 𝑆 𝐹 𝑝𝑒𝑟 𝑑𝑜𝑙𝑙𝑎𝑟
Cost of watches in U.S. dollars = 0,6028
= $1.658.925

Cost of watches in USD is $1.658.925

b. What is the cost, in dollars, of the second 15,000 batch if payment is made in 90
days and the spot rate at that time equals today’s 90-day forward rate?
Answer:
The purchase price of 15.000 S watches is 1.000.000 french
The 90 days forward rate for S F per USD is 0,6075
Cost of 15.000 watches in USD if it is purchased at 90 days forward rate will be
calculated by dividing total purchase price by 90 day forward rate of S F per USD.
1.000.000 𝑆 𝐹 𝑝𝑒𝑟 𝑑𝑜𝑙𝑙𝑎𝑟
Cost of watches in U.S. dollars = 0,6075
= $1.646.091

Cost of watches in USD is $1.646.091

c. If the exchange rate for the Swiss franc is 0.50 to $1 in 90 days, how much will
Desreumaux have to pay (in dollars) for the watches?
Answer:
If the exchange rate is 0,50 S F to one USD when payment is due in 90 days, the cost
of purchasing 1.000.000 S F will be calculated by dividing the purchase price by the
exchange rate of S F to USD.
1.000.000 𝑆 𝐹 𝑝𝑒𝑟 𝑑𝑜𝑙𝑙𝑎𝑟
Cost of watches in U.S. dollars = 0,50
= $2.000.000

Therefore, Desreumaux has to pay $2.000.000 for the watches

(17-13) After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds
of dividends per share from a British subsidiary this year. The exchange rate at the end
of the year is expected to be $1.60 per pound, and the pound is expected to depreciate
5% against the dollar each year for an indefinite period. The dividend (in pounds) is
expected to grow at 10% a year indefinitely. The parent U.S. corporation owns 10
million shares of the subsidiary. What is the present value, in dollars, of its equity
ownership of the subsidiary? Assume a cost of equity capital of 15% for the subsidiary.
Answer:
Present value in dollars:
The dividend in pounds grows at 10%, but the pound depreciates at 5%. Thus, the dollar
dividend will grow at 5%. Value per share (Po) using the perpetual growth valuation formula:
$4.80 : (0,15-0,05) = $48
The total of the equity is $48 x 10.000.000 = $480.000.000