Question 1 If a firm has sales of $42 791 000 a year and the average collection period for the

QUESTION

Question 1If a firm has sales of $42,791,000 a year, and the average collection period for the industry is 40 days, what should this firms accounts receivable be if the firm is comparable to the industry?Question 2Temple Square Inc. reported that its retained earnings for 2005 were $490,000. In its 2006 financial statements, it reported $60,000 of net income, and it ended 2006 with $510,000 of retained earnings. How much were paid as dividends to shareholders during 2006?Question 3Collins Incs latest net income was $1 million, and it had 200,000 shares outstanding. The company wants to pay out 40% of its income. What dividend per share should the company declare?Question 4If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what would be the most likely effect on short-term securities prices and interest rates?
Answer 1 If the firm is comparable to industry, the average collection period for the firm will match with average collection period for the industry and will be 40 days. This means that of the total sales made during the year over 365 days, the debtors or accounts receivables will be for 40 days of sales. Assuming sales during the year is evenly distributed, the daily average sales is $42,791,000 / 365 or $117,235.62 Accounts receivables = 40 times daily average sales = 40 * $117,235.62 = $4,689,424.80 Answer 2 Retained Earnings in 2005 = $490,000 Net Income in 2006 = $60,000 Retained Earnings in 2006 = $510,000 Retained Earnings = Last Year Retained Earnings + Current Year Net Income Dividend paid during the year. Or, $510,000 = $490,000 + $60,000 Dividend paid during the year Or,

Dividend paid in 2006 = $40,000 Answer to 3 Net Income = $1,000,000 Outstanding Shares = 200,000 Dividend payout = 40% of net income = $400,000 Dividend per share = $400,000 / 200,000 = $2.0 per share Answer to 4 Price of the bond and interest rates are inversely correlated i.e,if the bond prices fall, interest rate will rise and vice versa. Hence if the Federal Reserve sells $50 billion of short-term US Treasury securities, the price of short-term securities will drop but interest rates will rise.

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