Problem 16-14
Cash Budgeting
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,000 per month, and the rent is $2,800 per month. In addition, she must make a tax payment of $13,000 in December. The current cash on hand (on December 1) is $450, but Koehl has agreed to maintain an average bank balance of $4,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $100,000.
| Sales | Purchases | |||
| December | $140,000 | $30,000 | ||
| January | 42,000 | 30,000 | ||
| February | 54,000 | 30,000 | ||
| I. Collections and Purchases: | ||||||
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| Sales | $ | $ | $ | |||
| Purchases | $ | $ | $ | |||
| Payments for purchases | $ | $ | $ | |||
| Salaries | $ | $ | $ | |||
| Rent | $ | $ | $ | |||
| Taxes | $ | --- | --- | |||
| Total payments | $ | $ | $ | |||
| Cash at start of forecast | $ | --- | --- | |||
| Net cash flow | $ | $ | $ | |||
| Cumulative NCF | $ | $ | $ | |||
| Target cash balance | $ | $ | $ | |||
| Surplus cash or loans needed | $ | $ | $ | |||
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Joshua Kelly estimates that taking some classes would result in earning $10,000 more a year for the next 50 years. Based on an annual interest rate of 8 percent, calculate the future value of these classes. Use Exhibit 1-B. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)
future value =
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What is the future value of a 5%, 10 year annuity due that pays $15,000 per year? What is the present value of a 5%, 10 year annuity due that pays $15,000 per year?
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What are derivatives? How can derivatives be used to reduce
risk? Can derivatives be used to increase
risk? Explain
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what is 10 percent increase on
(a) $25.706B
(b) $25.533B
(c) $24.536B
(d) $24.658B
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The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. |
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MOOSE TOURS, INC. 2015 Income Statement |
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| Sales | $ | 758,000 | ||||
| Costs | 593,000 | |||||
| Other expenses | 14,000 | |||||
| Earnings before interest and taxes | $ | 151,000 | ||||
| Interest expense | 10,000 | |||||
| Taxable income | $ | 141,000 | ||||
| Taxes (40%) | 56,400 | |||||
| Net income | $ | 84,600 | ||||
| Dividends | $ | 33,840 | ||||
| Addition to retained earnings | 50,760 | |||||
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MOOSE TOURS, INC. Balance Sheet as of December 31, 2015 |
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| Assets | Liabilities and Owners’ Equity | ||||||
| Current assets | Current liabilities | ||||||
| Cash | $ | 21,740 | Accounts payable | $ | 55,900 | ||
| Accounts receivable | 34,060 | Notes payable | 15,100 | ||||
| Inventory | 71,020 | ||||||
| Total | $ | 71,000 | |||||
| Total | $ | 126,820 | Long-term debt | $ | 102,000 | ||
| Fixed assets | Owners’ equity | ||||||
| Net plant and equipment | $ | 275,000 | Common stock and paid-in surplus | $ | 102,000 | ||
| Retained earnings | 126,820 | ||||||
| Total | $ | 228,820 | |||||
| Total assets | $ | 401,820 | Total liabilities and owners’ equity | $ | 401,820 | ||
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What is the EFN if the firm was operating at only 80 percent of capacity in 2015? Assume that fixed assets are sold so that the company has a 100 percent asset utilization. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
| EFN |
$ |
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If you borrow $7,000 with an interest rate of 3 percent, to be repaid in five equal yearly payments at the end of the next five years, what would be the amount of each payment? Use Exhibit 1-D. (Round time value factor to 3 decimal places and final answer to 2 decimal places.)
Amount of each paymet
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Problem 12-09
Financing Deficit
Garlington Technologies Inc.'s 2016 financial statements are shown below:
Balance Sheet as of December 31, 2016
| Cash | $ 180,000 | Accounts payable | $ 360,000 | |
| Receivables | 360,000 | Notes payable | 156,000 | |
| Inventories | 720,000 | Line of credit | 0 | |
| Total current assets | $1,260,000 | Accruals | 180,000 | |
| Fixed assets | 1,440,000 | Total current liabilities | $ 696,000 | |
| Common stock | 1,800,000 | |||
| Retained earnings | 204,000 | |||
| Total assets | $2,700,000 | Total liabilities and equity | $2,700,000 |
Income Statement for December 31, 2016
| Sales | $3,600,000 |
| Operating costs | 3,279,720 |
| EBIT | $ 320,280 |
| Interest | 18,280 |
| Pre-tax earnings | $ 302,000 |
| Taxes (40%) | 120,800 |
| Net income | 181,200 |
| Dividends | $ 108,000 |
Suppose that in 2017 sales increase by 15% over 2016 sales and that 2017 dividends will increase to $128,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 12%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.
| Garlington Technologies Inc. Pro Forma Income Statement December 31, 2017 |
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| Sales | $ | ||
| Operating costs | $ | ||
| EBIT | $ | ||
| Interest | $ | ||
| Pre-tax earnings | $ | ||
| Taxes (40%) | $ | ||
| Net income | $ | ||
| Dividends: | $ | ||
| Addition to RE: | $ | ||
| Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017 |
|||
| Cash | $ | ||
| Receivables | $ | ||
| Inventories | $ | ||
| Total current assets | $ | ||
| Fixed assets | $ | ||
| Total assets | $ | ||
| Accounts payable | $ | ||
| Notes payable | $ | ||
| Accruals | $ | ||
| Total current liabilities | $ | ||
| Common stock | $ | ||
| Retained earnings | $ | ||
| Total liabilities and equity | $ | ||
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Forecasted Statements and Ratios Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):
Sales for 2016 were $450 million and net income for the year was $13.5 million, so the firm's profit margin was 3.0%. Upton paid dividends of $5.4 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.
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7. Indri runs a soil testing business. He decides to form a company to take over the business. He is the sole shareholder and sole director. Indri sells his business to the company at an inflated price and lends the company $90,000 to help meet the cost of purchase. As security for the loan, Indri arranges a mortgage over a vacant block of land, which he transferred to the company as part of the business sale. In the first year of operation, the business makes a small profit (after paying both Indri and his daughter’s wages), but by the end of 2012 it is clear that the building industry is going through a major slump. Indri becomes desperate and works even harder. While working late into the night, Indri badly injures his hand and needs surgery. He is away from the business for 2 weeks. His efforts to keep the business afloat are in vain and the company is forced into liquidation. On realization of the assets, it is found that the company has approximately $95,000 to go towards meeting creditors’ claims of $210,000:
(i) If Indri is the only secured creditor, will he get his $90,000 back?
(ii)Can Indri claim workers’ compensation for the injuries to his hand and his time off work?
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Examine the various ways in which a company can grow in terms of its common stock.
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OceanGate sells external hard drives for $280 each. Its total fixed costs are $30 million, and its variable costs per unit are $230. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2 million drives, but if there is a recession, it will sell only half as many.
a. What is the firm's degree of operating leverage (defined as the ratio of the percent change in EBIT to the percent change in sales) in going from a recession to a strong economy?
Degree of operating leverage
b. If the economy enters a recession, what will be the firm’s after-tax profit? (Enter your answer in millions.)
After-tax profit
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Morgan Stanley and Goldman Sachs are examples of banks that perform investment banking duties. Analyze the method for transferring money to firms seeking cash.
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The market price of a security is $52. Its expected rate of return is 12.1%. The risk-free rate is 4% and the market risk premium is 7.3%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Market price=
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Summarize the basic process for valuing assets
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