Question 7: (Forecasting) 8 points Jolly Joe\'s Novelties, Inc. had the financia

Question

Question 7: (Forecasting) 8 points

Jolly Joe's Novelties, Inc. had the financial data shown below last year. Jolly Joe's has just invented a new toy which they expect will cause sales to double from $100,000 to $180,000, increasing net income to $12,000. From experience the company knows that when sales changes, all current assets plus accounts payable and accrued expenses change at the same percentage rate, and the company feels they can handle the increase without adding any fixed assets. a. Will Jolly Joe's need any new outside funding if they pay no dividends? b. If so, how much will be needed?

Question 8: (Working Capital Management) 4 points

Suppose it takes Jolly Joe’s Novelties, Inc. 5 days to build and sell toys (on average). Also suppose it takes the firm’s customers 35 days, on average, to pay for the toys after they have purchased them on credit. Finally, suppose the firm is able to delay paying for the materials it uses in the manufacturing process for 30 days. Given these conditions, how long is Jolly Joe’s cash conversion cycle?

Question 9: (Working Capital Management) 4 points

If Jolly Joe’s buys $100 worth of supplies on credit with terms 3/10 n30 and pays the bill on the 28th day after the purchase:

   a. What is the approximate, or “nominal,” cost of trade credit as an annual rate?

Explanation / Answer

Existing Sales 100000 New Sales 180000 % increase in Sales: (180000-100000)/100000 80% Particulars Existing Increase Proposed Current Assets Cash $8,000 8000*1.80 $14,400 Accounts receivable $4,500 4500*1.80 $8,100 Inventory $9,500 9500*1.80 $17,100 Total Current Assets $22,000 22000*1.80 $39,600 Fixed Assets $340,000 $340,000 Total Assets $362,000 $379,600 Liabilities & Equity Current Liabilities Accounts Payable $3,500 3500*1.80 $6,300 Accrued Expenses $1,500 1500*1.80 $2,700 Notes Payable: (Balancing Figure) $20,000 $1,600 $21,600 Total Current Liabilities $25,000 $30,600 Mortgage $265,000 $265,000 Total Liabilities $290,000 $295,600 Common Stock $32,000 $32,000 Retained Earnings $40,000 $12,000 $52,000 Total Equity $72,000 $84,000 Total Liabilities & Equity $362,000 $379,600 Total External Funding Required: 379600-6300-2700-265000-32000-52000 $21,600 Less: Existing Funding -$20,000 New External Funding $1,600

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