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 $32.4 million, accounts receivable are $4.44 million, ACP is 25 days, net income is $4.25 million, and debt-to-equity is 1.4 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 4 percent. Any change in accounts receivable 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 turnover, equity multiplier, ROA, and ROE? (Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 2 decimal places and other answers to 2 decimal places. Use 365 days a year.)

Answer 1

sales are going to increase by 4%

the assets are going to increase by 4% as the account receivable will be increasing BY: 4% *4.44=O.1776

ROA = NET INCOME/TOTAL ASSETS

NI=4.25 MILLION

TOTAL ASSETS=32.4+0.1776

=32.5

4.25/32.5

=13.07%

ROE WILL INCREASE BECAUSE THE NET INCOME WILL INCREASE BUT THE EQUITY WILL REMAIN UNCHANGED.

=NI/EQUITY

NET INCOME WILL INCREASE BY 4% IF WE ASSUME THAT ALL OTHER COSTS ARE CONSTANT ANS SALES ARE INCREASING BY 4%. 4.42 WILL BE THE NET INCOME.

TOTAL ASSET TURNOVER= WILL REAMAIN UNCHANGED APPROXIMATELY DUE TO CHANGES IN BOTH SALES AND ASSETS.AS BOTH ARE INCREASING.

ROE WILL INCREASE AS NET INCOME WILL INCREASE BUT EQUITY WILL REMAIN UNCHANGED.