Financial Forecasting Study Problems 14-4 (page 453) and ...



Financial Forecasting Study Problems 14-4 (page 453) and 15-8 (page 482): remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome using EXCEL.

Problem: 14-4 Financial Forecasting-percent of Sales. Tulley Appliances Inc. projects next year’s sales to be $20 million. Current sales are $15 million, based on current assets of $5 million and fixed assets of $5 million. Firms net profit margin is 5 percent after taxes. Tulley forecasts that its current assets will rise in direct proportion to the increase in sales, but that its fiexed assets will increase by only $100,000. Currently, Tulley has $1.5 million in accounts payable (which vary directly with sales), $2 million in long-term debt (due in 10 years), and common equity (including $4 million in retained earnings) totaling $6.4 million. Tulley plans to pay $500,000 in common stock dividends next year. a. What are Tulley’s total financing needs. Ie. , total assets for the coming year? b. Given the firm’s projections and dividend payment plans, what are its discretionary financing needs? c. Based on your projections, and assuming that the $100,000 expansion in fixed assets will occur, what is the largest increase in sales the firm can support without having to resort to the use of discretionary sources of financing?

Problem 15-8; Cost of Accounts Receivable. Johnson Enterprises Inc. is involved in the manufacture of and sale of electronic components used in small AM/FM radios. The firm needs $300,000 to finance an anticipated expansion in receivables due to increased sales. Johnson’s credit terms are net 60 and its average monthly credit sales are $200,000. IN general, the firms customer pay within the credit period: Thus, the firm’s average accounts receivable balance is $400,000. Chuck Idol, Johnson’s comptroller, approached the firm’s bank with a request for a loan for the $300,000 using the firm’s accounts receivable as collateral. The bank offered to make a loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged ($200,000 per month). Furthermore, the bank agreed to lend up to 75 percent of the face value of the receivables pledged. a. Estimate the cost of the receivables loan to Johnson when the firm borrows the $300,000. The prime rate is currently 11 percent. b. Idol also requested a line of credit for $300,000 from the bank. The bank agreed to grant the necessary line of credit at a rate of 3 percent over prime and required a 15 percent compensating balance. Johnson currently maintains an average demand deposit of $80,000. Estimate the cost of the line of credit to Johnson. c. Which source of credit should Johnson select? Why? 1. Interest

Rate Risk and Ratio Analysis Complete 16-12 (page 513) and 16-16 (page 514) Remember to complete all parts of the problems and report the results of your analysis. Do not forget to show the necessary steps and explain how your attained that outcome in EXCEL format. ________________________________________

Problem 16-12: Interest rate risk; Two years ago your corporate treasurer purchased for the firm a 20 year bond at its par value of $1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9 percent. A cash shortage has forced you to instruct your treasurer ot liquidate the bond. a. At what price will your bond be sold? Assume annual compounding. b. What will be the amount of your gain or loss over the original purchase price? c. What would be the amount of your gain or loss had the treasurer originally purchased a bond with a 4-year rather than a 20 –year maturity? (Assume all characteristics of the bonds are identical except their maturity periods.) d. What do we call this type of risk assumed by your corporate treasurer?

Problem 16-16: Ratio Analysis Assuming a 360-day year, calculate what the average investment in inventory would be for a firm, given the following information in each case. a. The firm has sales of $600,000, a gross profit margin of 10 percent, and an inventory turnover ratio of 6. b. The firm has a cost-of-goods sold figure of $480,000 and an average age of inventory of 40 days. c. The firm has a cost-of-goods-sold figure of $1.15 million and an inventory turnover rate of 5. d. The firm has a sales figure of $25 million, a gross profit margin of 14 percent, and an average age of inventory of 45 days.

P14-4)

(a) Projected Financing Needs = Projected Total Assets

= Projected Current Assets + Projected Fixed Assets

={ x $20 m} +{ $5m + $.1m} = $11.77m

(b) DFN = Projected Current Assets + Projected Fixed Assets

- Present LTD - Present Owner's Equity

- [Projected Net Income - Dividends]

- Spontaneous Financing

={ x $20m} + $5.1m - $2m - $6.5m

- [.05 x $20m - $.5m] -{ x $20m}

DFN = $6.67m + $5.1m - $8.5m - $.5m - $2m = $.77m

(c) We first solve for the maximum level of sales for which DFN = 0:

DFN = ([pic] - .05 - [pic] ) Sales – (5.1M-2M-6.5M +.5M)

DFN = .1833 SALES - $2.9M = 0

Thus, SALES = $15.82M

The largest increase in sales that can occur without a need to raise "discretionary funds" is

$15.82M - $15M = $820,000.

P15-8)

a. APR = [pic] x [pic] = .21 or 21%

* ($400,000 x 0.13 x .75) = $39,000

** (200,000 x .01 x 12) = $24,000

b. $300,000 x .15 = $45,000 (compensating balance)

Since Johnson normally maintains a balance of $80,000 with the bank, the compensating balance requirement will not increase the effective cost of credit.

[pic] x [pic] = 0.14 or 14%

Interest = $300,000 x .14 = $42,000.

c. Choose the line of credit since the effective interest is considerably lower. Note, however, that the pledging arrangement may involve credit services to Johnson which would reduce Johnson’s credit department expense. If this were the case, then these savings would reduce the effective cost of that financing arrangement.

P16-12)

a. P = [pic] + [pic] = $912.44

PV Factor of an 18 years annuity at 9% = 8.7556

PV Factor of an amount to be received 18 years later discounted at 9% = 0.21199

The bond can be sold for $912.44. This was developed as follows:

$80 x (8.7556) + $1,000 x (.21199) = $912.44

b. $1,000 - $912.44 = $87.56 loss

c. First, we find the price of the 4-year bond, which now has 2 years remaining to maturity:

P = [pic] + [pic] = $982.41

PV Factor of an 2 years annuity at 9% = 1.7591

PV Factor of an amount to be received 2 years later discounted at 9% = 0.8417

The bond can be sold for $982.41. This was developed as follows:

$80 x (1.7591) + $1,000 x (.8417) = $982.41

Then, we can determine the expected capital loss on the shorter-term bond as follows:

$1,000 - $982.41 = $17.59

The capital loss on the shorter-term bond is much less than that suffered on the longer-term instrument.

d. Interest rate risk, which leads to a maturity premium.

P16-16)

a. [pic] = Gross Profit Margin

[pic] = 0.10

Cost of goods sold = $540,000

[pic] = Inventory turnover ratio

[pic] = 6

Average inventory = $90,000

b. Inventory turnover ratio = [pic]

Inventory turnover = [pic]

Inventory turnover ratio = 9 times

[pic] = 9 times

[pic] = 9 times

Average inventory = $53,333

c. [pic] = Inventory turnover ratio

[pic] = 5

Average inventory = $230,000

d. (1 - Gross profit margin) (Sales) = $21,500,000 cost of goods

(0.86)($25,000,000)

Inventory turnover ratio = [pic] = 8 times

[pic] = 8 times

Average inventory = $ 2,687,500

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