Cash Management at Richmond Corporation

Richmond Corporation was founded 20 years ago by its president, Daniel Richmond. The company originally began as a mail order company but has grown rapidly in recent years, in large part due to its website. Because of the wide geographical dispersion of the company’s customers, it currently employs a lockbox system with collection centers in San Francisco, St. Louis, Atlanta, and Boston.

Steve Dennis, the company’s treasurer, has been examining the current cash collection policies. On average, each lockbox center handles $185,000 in payments each day. The company’s current policy is to invest these payments in short-term marketable securities daily at the collection center banks. Every two weeks the investment accounts are swept and the proceeds are wire-transferred to Richmond’s headquarters in Dallas to meet the company’s payroll. The investment accounts each pay .068 percent per day and the wire transfers cost .20 percent of the amount transferred.

Steve has been approached by Third National Bank, located just outside Dallas, about the possibility of setting up a concentration banking system for Richmond Corp. Third National will accept the lockbox centers’ daily payments via automated clearinghouse (ACH) transfers in lieu of wire transfers. The ACH-transferred funds will not be available for use for one day. Once cleared, the funds will be deposited in a short-term account, which will yield .075 percent per day. Each ACH transfer will cost $200. Daniel has asked Steve to determine which cash management system will be the best for the company. Steve has asked you, his assistant, to answer the following questions:

1.What is Richmond Corporation’s total net cash flowfrom the current lockbox system that is available to meet payroll?

2.Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?

3.What cost of ACH transfers ^could make the company indifferent between the two systems?

please explain in detail.

ELECTRONIC TIMING, INC. Electronic Timing. Inc., (ETI) is a small company founded 15 years ago by electronics engineers Tom Miller and Jessica Kerr. ETI manufactures integrated circuits to capitalize on the complex mixed-signal design technology and has recently entered the market for frequency timing generators, or silicon timing devices, which provide the timing signals or “clocks” necessary to synchronize electronic systems. Its clock products originally were used in PC video graphics applications, but the market subsequently expanded to include motherboards, PC peripheral devices, and other digital consumer electronics, such as digital television boxes and game consoles. ETI also designs and markets custom application-specific integrated circuits (ASICs) for industrial customers. The ASIC’s design combines analog and digital, or mixed-signal, technology. In addition to Tom and Jessica, Nolan Pittman, who provided capital for the company, is the third primary owner. Each owns 25 percent of the one million shares outstanding. The company has several other individuals, including current employees, who own the remaining shares. Recently, the company designed a new computer motherboard. The company’s design is both more efficient and less expensive to manufacture, and the ETI design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the new motherboard, ETI determined that the costs involved in building a new plant would be prohibitive. The owners also decided that they were unwilling to bring in another large outside owner. Instead, ETI sold the design to an outside firm. The sale of the motherboard design was completed for an aftertax payment of $30 million.

Tom believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? How will it affect the value of the company?

Jessica believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Jessica’s proposals affect the company?

Nolan is in favor of a share repurchase. He argues that a repurchase will increase the company’s PE ratio, return on assets, and return on equity. Are his arguments correct? How will a share repurchase affect the value of the company?

Another option discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?

One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is one minus b, where b is the “retention” or “plowback” ratio. So, the dividend next year will be the earnings next year, E1, times one minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of a share of stock today: Images What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain. Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC?

Kelowna Microchips Inc. Kelowna Microchips Inc. (KMI) is a small company founded 15 years ago by electronics engineers Justin Langer and Suzanne Maher. KMI manufactures integrated circuits to capitalize on the complex mixed-signal design technology and has recently entered the market for frequency timing generators, or silicon timing devices, which provide the timing signals or “clocks” necessary to synchronize electronic systems. Its clock products originally were used in PC video graphics applications, but the market subsequently expanded to include motherboards, PC peripheral devices, and other digital consumer electronics, such as digital television boxes and game consoles. KMI also designs and markets custom application specific integrated circuits (ASICs) for industrial customers. The ASIC's design combines analog and digital or mixed-signal technology. In addition to Justin and Suzanne, Andrew Keegan, who provided capital for the company, is the third primary owner. Each owns 25 percent of the one million shares outstanding. The company has several other individuals, including current employees, who own the remaining shares. Recently, the company designed a new computer motherboard. The company's design is both more efficient and less expensive to manufacture, and the KMI design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the new motherboard, KMI determined that the costs involved in building a new plant would be prohibitive. The owners also decided that they were unwilling to bring in another large outside owner. Instead, KMI sold the design to an outside firm. The sale of the motherboard design was completed for an after-tax payment of $30 million. QUESTIONS 1. Justin believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? How will it affect the value of the company? 2. Suzanne believes the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Suzanne's proposals affect the company? 3. Andrew favours a share repurchase. He argues that a repurchase will increase the company's P/E ratio, return on assets, and return on equity. Are his arguments correct? How will a share repurchase affect the value of the company? 4. Another option discussed by Justin, Suzanne, and Andrew would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal? 5. One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the following. The dividend payout ratio is 1 minus b, where b is the “retention” or “plowback” ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most commonly used equation to calculate the growth rate is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of a share of stock today: Click here for a description of Equation: Mini Case Question 5. where Rs = Expected rate of return What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain.

Founded nearly 50 years ago by Alfred Lester-Smith, Beautiful Clocks specializes in developing and marketing a diverse line of large ornamental clocks for the finest homes. Tastes have changed over the years, but the company has prospered by continually updating its product line to satisfy its affluent clientele. The Lester-Smith family continues to own a majority share of the company and the grandchildren of Alfred Lester-Smith now hold several of the top managerial positions. One of these grandchildren is Meredith Lester-Smith, the new CEO of the company .Meredith feels a great responsibility to maintain the family heritage with the company. She realizes that the company needs to continue to develop and market exciting new products. Since the 50th anniversary of the founding of the company is rapidly approaching, she has decided to select a particularly special new product to launch with great fanfare on this anniversary. But what should it be? As she ponders this crucial decision, Meredith’s thoughts go back to the magnificent grandfather clock that her grandparents had in their home many years ago. She had admired the majesty of that clock as a child. How about launching a modern version of this clock? This is a difficult decision. Meredith realizes that grandfather clocks now are largely out of style. However, if she is so nostalgic about the memory of the grandfather clock in her grandparents’ home, wouldn’t there be a considerable number of other relatively wealthy couples with similar memories who would welcome the prestige of adding the grandeur of a beautifully designed limited-edition grandfather clock in their home? Maybe. This also would highlight the heritage and continuity of the company. It all depends on whether there would be enough sales potential to make this a profitable product. Meredith had an excellent Business Analytics course at JMU, so she realizes that breakeven analysis is needed to help make this decision. With this in mind, she instructs several staff members to investigate this prospective product further, including developing estimates of the related costs and revenues as well as forecasting the potential sales. One month later, the preliminary estimates of the relevant financial figures come back. The cost of designing the grand-father clock and then setting up the production facilities to produce this product would be approximately$250,000. There would be only one production run for this limited-edition grandfather clock. The additional cost for each clock produced would be roughly$2,000. The marketing department estimates that their price for selling the clocks can be successfully set at about$4,500 apiece, but a firm forecast of how many clocks can be sold at this price has not yet been obtained. However, it is believed that the sales likely would reach into three digits. The production floor chief has estimated a maximum operating capacity of 500 clocks.

1. Develop a spreadsheet model for the situation described above, assuming production is set at full capacity: Be sure to put all numerical values in separate cells from formulas. Format all dollar amounts with $ signs and 0 decimals for all values. Format all other numerical amounts as Number with thousands separator. Name this sheet Beautiful Clocks Model.

2. Write a formula to calculate the breakeven number of clocks on your spreadsheet. Show the procedure to get to the formula in your written report. Format this cell as a number with a comma and 0 decimals. In a separate cell compute the breakeven number clocks as a percentage of the maximum capacity. Format this cell as a percentage with 0 decimals. A fairly reliable forecast now has been obtained indicating that the company would be able to sell 300 of the limited-edition grandfather clocks, which appears to be enough to justify introducing this new product. However Meredith is concerned that this conclusion might change if more accurate estimates were available for the various costs and revenues. Therefore she wants what-if analysis done on these estimates:

3. Construct a data table based on your spreadsheet model using Excel’s Data Table command to show the breakeven number of clocks and percentage of maximum capacity with a price ranging from$2,500 to$5,000 per clock (in increments of$500).Put a border around the contents of the table. Format the amount inside the table as a Number with 0 decimals. Format percent values inside the table as Percentage with 0 decimals.

4. Construct a data table based on your spreadsheet model using Excel’s Data Table command to show the net profit associated with the selling price ranging from$2,500 to$5,000 (in increments of$500) as the variable cost per clock varies from$1,000 to$4,500 (in increments of$500 across the top of the table and assuming the production volume remains at 300 clocks).Put a border around the contents of the table. Format all dollar amounts as Currency with 0 decimals. Apply conditional formatting to the cells in the table that exceed$400,000

Electronic Timing, Inc. (ETI), is a small company founded 15 years ago by electronics engineers Tom Miller and Jessica Kerr. ETI manufactures integrated circuits to capitalize on the complex mixed-signal design technology and has recently entered the market for frequency timing generators, or silicon timing devices, which provide the timing signals or “clocks” necessary to synchronize electronic systems. Its clock products originally were used in PC video graphics applications, but the market subsequently expanded to include motherboards, PC peripheral devices, and other digital consumer electronics, such as digital television boxes and game consoles. ETI also designs and markets custom application specific integrated circuits (ASICs) for industrial customers. The ASIC’s design combines analog and digital, or mixed-signal, technology. In addition to Tom and Jessica, Nolan Pittman, who provided capital for the company, is the third primary owner. Each owns 25 percent of the 1 million shares outstanding. The company has several other individuals, including current employees, who own the remaining shares.
Recently, the company designed a new computer motherboard. The company’s design is both more efficient and less expensive manufacture, and the ETI design is expected to become standard in many personal computers. After investigating the possibility of manufacturing the new motherboard, ETI determined that the costs involved in building the new plant would be prohibitive. The owners also decided that they were unwilling to bring in another large outside owner. Instead, ETI sold the design to an outside firm. The sale of the motherboard design was completed for an after tax payment of $30 million.

QUESTIONS:
1. Tom believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? How will it affect the value of the company?

2. Jessica believes the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Jessica’s proposals affect the company?

3. Nolan favors a share repurchase. He argues that a repurchase will increase the company’s P/E ratio, return on assets, and return on equity. Are his arguments correct? How will a share repurchase affect the value of the company?

4. Another option discussed by Tom, Jessica and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?

5. One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minus b, where b is the “retention” or “plowback” ratio. So, the dividend next year will be the earnings next year, ?1 , times 1 minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of a share of stock today: ?0 = ?1(1−?) ??−???×?
What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain.

6. Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC?

use chart for ALL questions

Hernandez Inc. was founded on 12/1/2017. The initial balance sheet is as follows:

Suppose that the following transactions occurred between 12/1/2017 and 12/31/2017:

Inventory purchase of $600 (paid in cash)

$1600 worth of credit sales (due on 1/31/2018)

Operating Accruals of $50

Depreciation of $200

Taxes of $100 (paid 12/20/2017)

Ending inventory of $400

QUESTIONS:

47. What is the company’s net income on 12/31/2017?

48. Find the amount of cash the company paid to its suppliers from 12/1-12/31.  

49. What is the company’s cash flow from operations on 12/31/2017?

50. What is the retained earnings balance on 12/31/2017?

51. Find Hernandez Inc.'s operating cash margin from 1/1-1/31.

>> IKEA

IKEA was founded in 1943 by a 17-year-old Swede named Ingvar Kamprad who sold pens, Christmas cards, and seeds out of a shed on his family’s farm. The name IKEA was derived from Kamprad’s initials (IK) and the first letters of the Elmtaryd farm and the village of Agunnaryd where he grew up (EA). Over the years, the company grew into

a retail titan in home furnishings and a global cultural phe- nomenon, inspiring BusinessWeek to call it a “one-stop sanctuary for coolness” and “the quintessential cult brand.”

IKEA inspires remarkable levels of interest and devo- tion from its customers. Each year more than 650 million visitors walk through its stores all over the world. Most need to drive 50 miles round-trip but happily make the effort in order to experience IKEA’s unique value proposi- tion: leading-edge design and functional home furnish- ings at extremely low prices

IKEA’s Scandinavian-designed products are well made and appeal to the masses. To stay relevant and fashionable, the company replaces approximately one- third of its product lines each year. Most have Swedish names, such as HEKTAR lamps, BILLY bookcases, and LACK side tables. Kamprad, who was dyslexic, believed it was easier to remember product names rather than codes or numbers.

Besides featuring fashionable and good-quality prod- ucts, IKEA stands out in the industry because of its bar- gain prices. The company’s vision is and always has been “to create a better everyday life for the many people.” As Kamprad said, “People have very thin wallets. We should take care of their interests.” A high percentage of its cus- tomers are college students and families with children.

IKEA continuously seeks out new ways to run its businesses more efficiently and pass those cost savings on to the customer. In fact, it reduces prices across its products by 1 percent to 3 percent annually. How can it do so? For starters, IKEA engages the consumer on many levels, including having the customer do all the shopping, shipping, and assembly.

IKEA’s floor plan is designed in a winding, one- way format featuring different inspirational room settings, so consumers experience the entire store. Next, they can grab a shopping cart, pay for the items, visit the warehouse, and pick up their purchases in flat boxes. Consumers load the items in their car, take them home, and completely assemble the products themselves. This strategy makes storage and transportation easier and cheaper for the store.

IKEA has also implemented several company-wide strategies to keep operational costs low. The company buys in bulk, controls the supply chain, uses lighter pack- aging materials, and saves on electricity through solar panels, low-wattage light bulbs, and energy from its own wind farms in six different countries. Its stores are located a good distance from most city centers, which helps keep land costs down and taxes low.

When IKEA develops new products, its designers and product developers start with a low price tag first and then work with one of their 1,350 suppliers around the world to develop the product within that price range. Designs are efficient, and waste is kept to a minimum. Most stores resemble a large box with few windows and doors and are painted bright yellow and blue—Sweden’s national colors.

Many of IKEA’s products are sold uniformly through- out the world, but the company also caters to local and regional tastes. For example, stores in China stock specific items for each New Year. During the Chinese Year of the Rooster, IKEA stocked 250,000 plastic place- mats with rooster themes, which quickly sold out. When employees realized U.S. shoppers were buying vases as drinking glasses because they considered IKEA’s regular glasses too small, the company developed larger glasses for the U.S. market. After IKEA managers vis- ited European and U.S. consumers in their homes, they learned that Europeans generally hang their clothes, whereas U.S. shoppers prefer to store them folded. As a result, IKEA designed wardrobes for the U.S. market with deeper drawers.

Showrooms in each country or region vary as well. For example, managers learned that many U.S. con- sumers thought IKEA sold only European-size beds. Beds are very important to U.S. consumers, so IKEA quickly changed its U.S. showrooms to feature king beds and a wide range of styles. After visiting Hispanic households in California, IKEA added more seating and dining space to its California stores, as well as brighter color palettes and more picture frames on the show- room walls. In China, IKEA set up its showrooms in small spaces to accurately reflect the small size of apartments in that country.

As the company expands globally, it is learning that attitudes towards its core DIY (do it yourself) delivery and assembly business model vary. In China, for ex- ample, consumers do not want to assemble products themselves and will pay a significant amount for home delivery and assembly. As a result, IKEA has added these services, and sales in Asia have taken off. The company plans to implement the same strategy in India, where DIY is also less common.

IKEA is known for its quirky marketing campaigns, which help generate excitement and awareness of its stores and brand. It ran a campaign inviting customers to be the “Ambassador of Kul” (Swedish for “fun”), but in order to collect the prize, the contestants had to live in an IKEA store for three full days before it opened, which they happily did.

Thousands of people will line up for a chance to win prizes and IKEA furniture. In Sweden, IKEA launched a Facebook page for the manager of a new store. Anyone who could tag his or her name to an IKEA product on the profile page won that item. The promotion generated thousands of tags.

IKEA has evolved into the largest furniture retailer in the world, with approximately 350 stores in 43 countries and revenues topping €27.9 billion, or $36 billion, in 2013. The majority of sales still come from Europe, but the company has aggressive plans to expand the $11 bil- lion brand further into Asia, India, and the United States.

1. Write the position statement for IKEA? Write the purchase of parity ? write the Write the purchase of parity ?
2. Into which consumer product classification dose the IKEA belongs to and write the implication 4ps marketing strategy?
3. What is the branding strategy of IKEA ? what is the product line ?
4. Write five product level ?
5. Which pricing strategy is appropriate for this case ?
6. Draw and explain the channel flow and which distribution strategy is used?
7. Develop a promotional campaign steps in developing effective communication ?

Based in Winnipeg, Manitoba, Clearview Security Technologies Inc. (Clearview) was founded to provide security systems, facilities controls, and related services. Clearview established a solid reputation for quality and the business grew, thanks to strong relationships with large long-term customers in Canada and the United States. Clearview has experienced little competitive pressure in its core market and the company's offerings are standardized, enabled by significant technological and financial barriers to entry.

The Research and Innovation Group (RIG) is the development side of the company. Where Clearview's primary lines are standardized, the RIG is all over the map. Clearview uses this smaller division to provide contract software and consulting to a wide range of business types.

The RIG is considering a new contract that will strain resources for not only the RIG, but the entire company. The project involves new technology, a new customer, and a new geographic area. The director of operations has warned you that it will be substantially more risky than anything Clearview does in its core business. With an upfront cost of C$8.5 million, managers want to develop an understanding of expected financing costs. The director of finance explained that understanding cost of capital will be a key part of maintaining and improving Clearview's competitive edge. RIG managers have noticed competing bids for the contract and it is expected that margins will be pushed down.

You have been asked to calculate the company's weighted average cost of capital (WACC), based on the following information. Over the last five years the annual dividends on the firm's stock have grown at 6 percent per year and this growth is expected to continue indefinitely. A dividend of $1.25 was recently paid. Common shares trade at $45 with 250,000 outstanding and no preferred shares. The yield on long-term government bonds is currently 3 percent and you believe the appropriate expected market risk premium is 5 percent (the long-term average). The stock's beta is 1.05. Clearview also has 25-year bonds with $1,000 face value, 6.5-percent semi-annual coupons, and 20 years to maturity. The bonds trade at 94.5. The initial bond offering raised $15.5 million and initially sold at par. The firm's marginal tax rate is 27 percent.

1. The cost of equity and debt
   1. Calculate Clearview's cost of equity using the constant growth model approach and the CAPM approach. Take the arithmetic average of the two results.
   2. Determine Clearview's after-tax cost of debt. Solving for the cost of debt is best done with a financial calculator, although trial and error will also yield the correct result. The bond valuation formula is required in this approach, substituting values for kb until the bond value is determined. A third method for determining the cost of debt is an approximation formula: kb approx. = ((annual coupon + (face – price)) ÷ years remaining) ÷ ((face + price) ÷ 2). The trial and error737approach can be completed much faster if the approximation method is used first to narrow the trial and error range.
2. The weight of equity and debt
   1. Calculate the weights of equity and debt in Clearview's capital structure.
   2. Determine Clearview's WACC.
3. The company will use its current capital structure to set target weights for debt and equity, with flotation costs of 2 percent for long-term debt and 7.5 percent for equity. How much capital must Clearview raise in order to cover the project cost and all flotation charges?

Case 1: Use of Technology

Federal Express (FedEx) was founded about 50 years ago. It handles on an average of 3 million package-tracking requests on a daily basis. To remain ahead of its competitors, FedEx strives on customer service by keeping a comprehensive website, FedEx.com. It increases customer service and reduces costs. For example, each request for information which can be retrieved from the website rather than by the call centre help FedEx to save an estimated $1.87. The costs for FedEx have been reduced from more than $1.36 billion per year to $21.6 million per year by customers using the website instead of the call centre calculating each package-tracking request costs Federal Express 3 cents.

Another know-how that improved its customer service is Ship Manager, an application installed on customers’ sites so users can determine shipping charges, weigh packages, and print shipping labels. Customers can also tie their invoices, billing, accounting and inventory systems to the application, Ship Manager.

Nevertheless, Federal Express still spend almost $326 million annually on its call centre to reduce customers’ annoyance when the website is down or when customers have difficulty using it. It uses CRM software called Clarify in its call centres to ensure customer service representatives’ job easier and to speed up response time.

Answer the following questions:

a)     What is the importance of technology to ensure high-quality customer service?

b)    Can you estimate Federal Express’ annual savings from using information technology?

c)     Can you give a few examples of information technologies used by Federal Express?

d)    What is the role of the application ‘Ship Manager’?

e)    Your overall observations and learning from the above case study.

Case 1: Use of Technology Federal Express (FedEx) was founded about 50 years ago. It handles on an average of 3 million package-tracking requests on a daily basis. To remain ahead of its competitors, FedEx strives on customer service by keeping a comprehensive website, FedEx.com. It increases customer service and reduces costs. For example, each request for information which can be retrieved from the website rather than by the call centre help FedEx to save an estimated $1.87. The costs for FedEx have been reduced from more than $1.36 billion per year to $21.6 million per year by customers using the website instead of the call centre calculating each package-tracking request costs Federal Express 3 cents. Another know-how that improved its customer service is Ship Manager, an application installed on customers’ sites so users can determine shipping charges, weigh packages, and print shipping labels. Customers can also tie their invoices, billing, accounting and inventory systems to the application, Ship Manager. Nevertheless, Federal Express still spend almost $326 million annually on its call centre to reduce customers’ annoyance when the website is down or when customers have difficulty using it. It uses CRM software called Clarify in its call centres to ensure customer service representatives’ job easier and to speed up response time. Answer the following questions: a) What is the importance of technology to ensure high-quality customer service? b) Can you estimate Federal Express’ annual savings from using information technology? c) Can you give a few examples of information technologies used by Federal Express? d) What is the role of the application ‘Ship Manager’? e) Your overall observations and learning from the above case study..