Question

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Cash Flow Franklin Co., a specialty retailer, has a history of paying quarterly dividends of $0.50...

Cash Flow

Franklin Co., a specialty retailer, has a history of paying quarterly dividends of $0.50 per share. Management is trying to determine whether the company will have adequate cash on December 31, 2018, to pay a dividend if one is declared by the board of directors. The following additional information is available:

  • All sales are on account, and accounts receivable are collected one month after the sale. Sales volume has been increasing 5% each month.
  • All purchases of merchandise are on account, and accounts payable are paid one month after the purchase. Cost of sales is 40% of the sales price. Inventory levels are maintained at $74,400.
  • Operating expenses in addition to the mortgage are paid in cash. They amount to $3,010 per month and are paid as they are incurred.
Franklin Co.
Balance Sheet
September 30, 2018
Cash $4,945 Accounts payable $5,080
Accounts receivable 12,700 Mortgage note** 150,000
Inventory 74,400 Common stock - $1 par 50,000
Note receivable* 10,400 Retained earnings 66,365
Building/Land 169,000    Total liabilities and
   Total assets $271,445 stockholders' equity $271,445

*Note receivable represents a one-year, 5% interest-bearing note due November 1, 2018.

**Mortgage note is a 30-year, 7% note due in monthly installments of $1,200.

Required:

1. Determine the cash that Franklin will have available to pay a dividend on December 31, 2018. Round intermediate calculations and final answer amount to the nearest dollar.
$

2. What can Franklin's management do to increase the cash available?

  • lengthen the average amount of time taken to pay for purchases of inventory.
  • Reduce inventory levels.
  • Reduce operating expenses.
  • Speed up the collection of receivables.
  • None of the above.
  • All of the above.

3. Should management recommend that the board of directors declare a dividend? Explain.

  • Management should not recommend the normal quarterly dividend of $0.50 per share because Franklin has cash to barely be able to meet the dividend payment.
  • Management should recommend the normal quarterly dividend of $0.50 per share because Franklin has enough cash to meet the dividend payment.
  • Management should not recommend the normal quarterly dividend of $0.50 per share because Franklin has not been able to generate sufficient profits to declare dividends.

Solutions

Expert Solution

1. Determine the cash that Franklin will have available to pay a dividend on December 31, 2018.

Answer : $ 27,257

Calculation

September sales collected in October       12,700
October sales collected in November       13,335
November sales collected in December       14,002
Total accounts receivable collections       40,037

October Sales =12700+(12700*5%) = 13,335

November sales collected in December = (13,335+(5%*13,335) = 14,002

September purchases paid for in October        5,080
October purchases paid for in November        5,334
November purchases paid for in December        5,601
Total payments on account       16,015

October purchases paid for in November = 13,335 * Cost of Sales = 13,335 * 40% = 5,334

November purchases paid for in December = 14,002 * Cost of Sales = 14,002 * 40% = 5,601

Cash balance, September 30, 2018        4,945
Add: Accounts receivable collection       40,037
Add: Note receivable due -November 1       10,400
Add: Interest due - November 1           520
Less: Cash paid for purchase      (16,015)
Less: Mortgage note payment       (3,600)
Less: Operating expenses       (9,030)
Cash balance, December 31, 2018       27,257

Interest due on November 1 = Note receivable * Interest rate on Note Receivable = 10,400 * 5% = 520

Mortgage note payments = Monthly Installments towards Note * 3 = 1,200 * 3 = 3,600

Operating expenses = Operating expenses paid in cash * 3 = 3,010 * 3 = 9,030

2.  What can Franklin's management do to increase the cash available?

Answer : All of the Above

Explanation

Management can reduce inventory level, speed up the receivables collection, reduce operating expenses and also lengthen the average amount of time taken to pay inventory purchase to increase the cash available with the firm. They could use any of these actions to increase the cash balance.

3. Should management recommend that the board of directors declare a dividend? Explain.

Answer :Management should not recommend the normal quarterly dividend of $0.50 per share because Franklin has cash to barely be able to meet the dividend payment.

Explanation:

Common stock = 50,000 shares

Quartery dividends Per share = $0.50

Amount needed = 50,000 * 0.50 = 25,000

So, 25,000 needed to pay the quarterly dividends.

Franklin has cash to barely be able to meet the dividend payment.  If they could increase the cash balance using any methods, they could pay dividends. Otherwise, they are not recommended to pay dividends.


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