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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

REGRESSION AND RECEIVABLES Edwards Industries has $320 million in sales. The company expects that its sales will increase 12% this year. Edwards’ CFO uses a simple linear regression to forecast the company's receivables level for a given level of projected sales. On the basis of recent history, the estimated relationship between receivables and sales (in millions of dollars) is as lollop s:

Receivables = $9.25 + 0.07(Sales)

Given the estimated sales forecast and tile estimated relationship between receivables and sales, what are your forecasts of the company's year-end balance for receivables and its year-end days sales outstanding (DSO) ratio? Assume that DSO is calculated on the basis of a 365-day year.

Summary Introduction

To compute: The sales forecast, year ended receivables and the days sales outstanding ratio.

Introduction:

Sales Forecast:

Sales forecast is the important point that arises while making the future plans. The management generally takes 5 years financial records and then studies it and decides the amount of turnover for the current and upcoming years.

Explanation

Given information:

Sales are $320 million.

Increase in sales by 12%

Formula to calculate the sales forecast is,

Salesforecast=Sales+Increaseinsales

Substitute $320,000,000 for sales and 12% for increase in sales in the above equation

SalesForecast=$320,000,000+($320,000,000×12%)=$320,000,000+$38,400,000=$358,400,000

Formula to calculate receivables given in question is,

Receivables=$9.25million+0.07(Sales)

Substitute $358,400,000 for sales in the above equation

Receivables=$9,250,000+0

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