You are considering investing in Dakota\'s Security Services. You have been able

Question

You are considering investing in Dakota's Security Services. You have been able to locate the following information on the firm: Total assets are S32.7 million, accounts receivable are $4.47 million, ACP is 25 days, net income is $4.40 million, and debt-to-equity is 1.2 times. All sales are on credit. Dakota's is considering loosening its credit policy such that ACP will increase to 30 days. The change is expected to increase credit sales by 5 percent. Any change in accountsceivable will be offset with a change in debt No other balance sheet changes are expected. Dakota's profit margin will remain unchanged. How will this change in accounts receivable policy affect Dakota's net income, total asset turmover, equity multiplier, ROA, and ROE? (Do not round intermediate calculations. Enter your answer in millions of dollars ronded to 2 decimal places and other answers to 2 decimal places. Use 365 days a year.) 4.69 m Net income Total asset turnover Equity multipler ROA ROE increases faster (Click to sele (Click to sele (Click to sele V 14 times times

Explanation / Answer

ACP = 365*(Receivables / Sales)

25 = 365*4.47 / Sales

Sales = 365*4.47 / 25 = 65.262

ACP is incresing from 25 to 30 will lead sales increase by 5%

New sales = 65.262*(1+5%) = 68.5251

New Receivbles = ACP * Sales / 365= 30*68.5251 / 365 = 5.6322

Increase in receivables = 5.6322 - 4.47 = 1.1622

Debt will increase by 1.1622

Total assets = 32.7 + 1.1622 = 33.8622

Previous profit margin = 4.4 / 65.262 = 6.74%

margin will be constant

New profit = 6.74% * 68.5251 = 4.62

Net profit increases by 4.62 - 4.4 = 0.22 million

Asset turnover = 68.5251/ 33.8622 = 2.024 times

Old ratio = 65.262 / 32.7 = 1.996

Asset turnover increases by 2.024 - 1.996 = 0.028 times

D/E = 1.2

Old Debt = (1.2/2.2)*32.7 = 17.84

Old Equity = 32.7 - 17.84 = 14.86

New Debt = 17.84 + 1.1622 = 19.00

New equity = 14.86 + 4.62 - 4.4 = 15.08

Old equity multiplier = 32.7 / 14.86 = 2.2

New equity multiplier = 33.8622 / 15.08 = 2.245

equity multiplier increases by 2.245 - 2.200 = 0.045 times

old ROA = 4.4/32.7 = 13.46%

New ROA = 4.62/33.8622 = 13.64%

ROA increases by 13.64% - 13.46% = 0.19 %

old ROE = 4.4/14.86 = 29.60%

New ROA = 4.62/15.08 = 30.63%

ROE increases by 30.63% - 29.60% = 1.03 %

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