Collins Company Had the Following Partial Balance Sheet and Complete

question 62

Multiple Choice

Collins Company had the following partial balance sheet and complete income statement information for last year: $\begin{array}{llcc} \text { Balance Sheet: } &\\ \text { Cash } &\$20\\ \text { \( \mathrm{A} / \mathrm{R} \) } &1,000\\ \text {Inventories } &\underline{2,000}\\ \text { Total current assets } &\$3,020\\ \text { Net fixed assets } &\underline{2,980}\\ \text {Total assets } &\underline{\$6,000}\\\\ \text { Income} &\\ \text {Statem } &\$10,000\\ \text { Cost of goods sold} &\underline{9,200}\\ \text {\( \mathrm{EBIT} \) } &\$800\\ \text {Interest \( (10 \%) \) } &\underline{400}\\ \text { EBT } &\$400\\ \text { Taxes (40\%) } &\underline{160}\\ \text { Net Income } &\underline{\$240}\\\end{array}$
The industry average DSO is 30 (360-day basis) .Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold.If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a
10% interest rate) , what will Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet?

• A)33.33%
• B)45.28%
• C)52.75%
• D)60.00%
• E)65.71%

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Definitions:

Closed Economy

An economic system that does not interact with other economies in terms of trade, investment, or migration.

Closed Economy

An economic system that does not engage in international trade with outside countries and relies wholly on its own resources.

Loanable Funds

The funds available for borrowing in the financial markets, consisting of savings and sometimes bank loans that are available to be lent to businesses and individuals.

Interest Rate

The rate at which borrowers are charged for accessing assets, specified as a percentage of the original sum borrowed.