Answers to Text Discussion Questions6-1.Rapidly expanding sales
will require a buildup in assets to support the growth. In
particular, more and more of the increase in current asset will be
permanent in nature. A non-liquidating aggregate stock of current
assets will be necessary to allow for floor displays, multiple
items for selection, and other purposes. All of these "asset"
investments can drain the cash resources of the firm.
6-2.If sales and production can be matched, the level of
inventory and the amount of current assets needed can be kept to a
minimum; therefore, lower financing costs will be incurred.
Matching sales and production has the advantage of maintaining
smaller amounts of current assets than level production, and
therefore less financing costs are incurred. However, if sales are
seasonal or cyclical, workers will be laid off in a declining sales
climate and machinery (fixed assets) will be idle. Here lies the
tradeoff between level and seasonal production: Full utilization of
capital assets with skilled workers and more financing of current
assets versus unused capacity, training and retraining workers,
with lower financing for current assets.
6-3.A cash budget helps minimize current assets by providing a
forecast of inflows and outflows of cash. It also encourages the
development of a schedule as to when inventory is produced and
maintained for sales (production schedule), and accounts
receivables are collected. The cash budget allows us to forecast
the level of each current asset and the timing of the buildup and
reduction of each.
6-4.Inflation has generally increased the cost of inventory that
the firm must carry. This, in turn, has expanded the borrowing
requirements of the firm and reduced the available cash balances.
Since inventory is the least liquid of current assets, the risk
exposure of the firm has increased with the expansion of inventory
holdings.
6-5.Only a financial manager with unusual insight and timing
could design a plan in which asset buildup and the length of
financing terms are perfectly matched. One would need to know
exactly what part of current assets are temporary and what part is
permanent. Furthermore, one is never quite sure how much short-term
or long-term financing is available at all times. Even if this were
known, it would be difficult to change the financing mix on a
continual basis.
6-6.By establishing a long-term financing arrangement for
temporary current assets, a firm is assured of having necessary
funding in good times as well as bad, thus we say there is low
risk. However, as indicated in Figure 6-12, long-term financing is
generally more expensive than short-term financing and profits may
be lower than those which could be achieved with a synchronized or
normal financing arrangement for temporary current assets.
6-7.By financing a portion of permanent current assets on a
short-term basis, we run the risk of inadequate financing in tight
money periods. However, since short-term financing is less
expensive than long-term funds, a firm tends to increase its
profitability over the long run (assuming it survives). In answer
to the preceding question, we stressed less risk and less return;
here the emphasis is on risk and high return.
6-8.The term structure of interest rates shows the relative
level of short-term and long-term interest rates at a point in
time. It is often referred to as a yield curve.
6-9.Liquidity premium theory, the segmentation theory, and the
expectations theory:
The liquidity premium theory indicates that long-term rates
should be higher than short-term rates. This premium of long-term
rates over short-term rates exists because short-term securities
have greater liquidity, and therefore higher rates have to be
offered to potential long-term bond buyers for enticement to hold
these less liquid and more price sensitive securities.
The segmentation theory states that Treasury securities are
divided into market segments by the various financial institutions
investing in the market. The changing needs, desires, and
strategies of these investors tend to strongly influence the nature
and relationship of short- and long-term rates.
The expectations hypothesis maintains that the yields on
long-term securities are a function of short-term rates. The result
of the hypothesis is that when long-term rates are much higher than
short-term rates, the market is saying that it expects short-term
rates to rise. When long-term rates are lower than short-term
rates, the market is expecting short-term rates to fall.
6-10.An inverted yield curve reflects investor expectations that
interest rates will decline in the future. Furthermore, an inverted
yield curve has usually preceded a recession. Lower interest rates
are generally a reflection of lower inflation and lower inflation
is usually the result of an economic slowdown. This information
would be valuable for planning purposes.
6-11.The factors that could be discussed include inflation,
inflationary pressures, monetary policy and the money supply,
fiscal policy (including spending, taxation, and deficits/debt) and
the demand for money, and international influences. A supply/demand
diagram is useful for discussing the impacts.
6-12. Before interest rates drop, a bond trader would like to
lock in longer term interest rates. The trader will see the value
of longer term bonds appreciate faster than short-term bonds for a
given increase in interest rates. The trader, by purchasing
longer-term bonds, relative to short-term bonds, will drive their
price up and their yields down. The yield curve will become
inverted.
6-13.Figure 6-12 shows the long-run view of short- and long-term
interest rates. Normally, short-term rates are much more volatile
than long-term rates.
6-14.Corporate liquidity has been decreasing since the early
1960s because of more sophisticated, profit-oriented financial
management (at times the profit orientation has been taken too
far). The use of the computer has allowed for more volume being
conducted with smaller cash balances. Also, inflation has forced a
diversion of funds away from liquid assets to handle ever-expanding
inventory costs. Likewise decreasing profitability during
recessions has diverted funds from liquid assets.
Internet Resources and Questions
1.www.bank-banque-canada.ca/english/bonds/htm
www.bank-banque-canada.ca/english/sel_hist.htm2.
www.bloomberg.com/markets/iyc.html3.
www.rbcds.com/english/online/corporate/index.html
Solutions to Text Problems6-1.Bondage Supply Company
$750,000 Sales
.10 Profit margin
75,000 Net income
( 22,500 Dividends (30%)
$ 52,500 Increase in retained earnings
120,000 Increase in assets
(52,500 Increase in retained earnings
$67,500 External funds needed
6-2.Garza Electronics
Beginning
Inventory +Production-Sales= Ending
Inventory
January 700 +600- 500= 800
February 800 +600- 250= 1,150
March1,150 +600-1,000= 750
6-3.Bombs Away Videoa.
Production and inventory schedule in units
Beginning
Inventory +Production1Sales2= Ending
Inventory
Jan.20,000+11.600 19,000= 12,600
Feb. 12,600
11,600 17,600 6,600
Mar. 6,600
11,600 4,000 14,200
Apr. 14,200
11,600 4,000 21,800
May21,800
11,600 3,000 30,400
June30,400
11,600 6,000 36,000
July36,000
11,600 8,000 39,600
Aug. 39,600
11,600 8,000 43,200
Sept. 43,200
11,600 10,000 44,800
Oct. 44,800
11,600 16,000 40,400
Nov. 40,400
11,600 20,000 32,000
Dec. 32,000
11,600 23,600 20,000
1 Total annual sales = $696,000
$696,000/$5 per unit = 139,200 units
139,200 units/12 months = 11,600 per month
2 Monthly dollar sales/$5 price = unit sales
b.
Cash Receipts Schedule
Jan.Feb.Mar.Apr.MayJune
Sales (in dollars)$95,000$88,000$20,000$20,000$15,000$30,000
30% cash sales28,50026,4006,0006,0004,5009,000
70% prior month=s sales70,000* 66,500 61,600 14,000 14,000
10,500
Total cash
receipts$98,500$92,900$67,600$20,000$18,500$19,500
*based on December sales of $100,000
JulyAug.Sept.Oct.Nov.Dec.
Sales (in
dollars)$40,000$40,000$50,000$80,000$100,000$118,000
30% cash sales12,00012,00015,00024,00030,00035,400
70% prior month=s sales 21,000 28,000 28,000 35,000 56,000
70,000
Total cash
receipts$33,000$40,000$43,000$59,000$86,000$105,400
c.
Cash Payments Schedule
Constant production
Jan.Feb.Mar.Apr.MayJune
11,600 units ( $2$23,200$23,200$23,200$23,200$23,200$23,200
Other cash payments40,00040,00040,00040,00040,00040,000
Total cash payments $63,200 $63,200 $63,200 $63,200 $63,200
$63,200
JulyAug.Sept.Oct.Nov.Dec.
11,600 units ( $2$23,200$23,200$23,200$23,200$23,200$23,200
Other cash payments40,00040,00040,00040,00040,00040,000
Total cash payments $63,200 $63,200 $63,200 $63,200 $63,200
$63,200
d.Cash Budget
Jan.Feb.Mar.Apr.MayJune
Net cash flow$35,300$29,700 $
4,400$(43,200)$(44,700)$(43,700)
Beginning cash 5,00040,30070,00074,40031,2005,000
Cumulative cash balance40,300 70,000 74,400 31,200 (13,500)
(38,700)
Monthly loan or (repayment)- 0 -- 0 -- 0 -- 0 -18,50043,700
Cumulative loan- 0 -- 0 -- 0 -- 0 -18,50062,200
Ending cash balance40,30070,00074,40031,2005,0005,000
JulyAug.Sept.Oct.Nov.Dec.
Net cash
flow($30,200)($23,200)($20,200)($4,200)$22,800$42,200
Beginning cash5,0005,0005,0005,0005,0005,000
Cumulative cash balance (25,200)(18,200)(15,200) 800 27,800
47,200
Monthly loan or
(repayment)30,20023,20020,2004,200(22,800)(42,200)
Cumulative loan92,400115,600135,800140,000117,200 75,000
Ending cash balance5,0005,0005,0005,0005,0005,000
6-4.Esquire Products, Inc.
a.Production and inventory schedule in units
Beginning
Inventory +Production1Sales2= Ending
Inventory
Jan. 8,000+ 9,000 12,000= 5,000
Feb. 5,000
9,000 7,500 6,500
Mar. 6,500
9,000 4,000 11,500
Apr. 11,500
9,000 5,000 15,500
May15,500
9,000 2,000 22,500
June22,500
9,000 1,000 30,500
July30,500
9,000 9,000 30,500
Aug. 30,500
9,000 11,000 28,500
Sept. 28,500
9,000 12,500 25,000
Oct. 25,000
9,000 15,000 19,000
Nov. 19,000
9,000 19,000 9,000
Dec. 9,000
9,000 10,000 8,000
1 $168,000 sales/$2 price = 84,000 units
84,000 units/12 months = 7,000 units per month
2 Monthly dollar sales/$2 = number of units
b.Cash Receipts Schedule (take dollar values from problem
statement)
Jan.Feb.Mar.Apr.MayJune
Sales (in dollars)$24,000$15,000$ 8,000$10,000$4,000$2,000
40% Cash sales9,6006,0003,2004,0001,600 800
60% Prior month's sales12,000* 14,400 9,000 4,800 6,000
2,400
Total receipts$21,600$20,400$12,200$ 8,800$ 7,600$ 3,200
*based on December sales of $20,000
JulyAug.Sept.Oct.Nov.Dec.
Sales (in dollars)$18,000$22,000$25,000$30,000$ 38,000$
20,000
40% Cash sales 7,200 8,80010,00012,00015,200 8,000
60% Prior month's sales 1,200 10,800 13,200 15,000
18,00022,800
Total receipts$ 8,400$19,800$23,200$27,000$33,200$ 30,800
c.
Cash Payments Schedule: Constant production
Jan.Feb.Mar.Apr.MayJune
9,000 units ( $1$ 9,000$ 9,000$ 9,000$ 9,000$ 9,000$ 9,000
Other cash payments$ 7,000$ 7,000$ 7,000$ 7,000$ 7,000$
7,000
Total payments$16,000$16,000$16,000$16,000$16,000$16,000
JulyAug.Sept.Oct.Nov.Dec.
9,000 units ( $1$ 9,000$ 9,000$ 9,000$ 9,000$ 9,000$ 9,000
Other cash payments$ 7,000$ 7,000$ 7,000$ 7,000$ 7,000$
7,000
Total payments$16,000$16,000$16,000$16,000$16,000$16,000
d.Cash Budget
Jan.Feb.Mar.Apr.MayJune
Cash flow$ 5,600$ 4,400 ($ 3,800) ($ 7,200)
($8,400)($12,800)
Beginning cash 3,0008,60013,0009,2003,0003,000
Cumulative cash balance8,600 13,000 9,200 2,000 (5,400)
(9,800)
Monthly loan or (repayment)( 0 (( 0 (( 0 ( 1,0008,40012,800
Cumulative loan( 0 (( 0 (( 0 ( 1,0009,40022,200
Ending cash balance$8,600$13,000 $9,200 $3,000$3,000$3,000
JulyAug.Sept.Oct.Nov.Dec.
Cash flow($ 7,600)$ 3,600$ 7,200$11,000$17,200$14,800
Beginning cash3,0003,0003,0003,0003,00012,200
Cumulative cash balance (4,600)6,60010,200 14,000
20,20027,000
Monthly loan or (repayment) 7,600(3,600)(7,200)(11,000)(8,000)(
0 (
Cumulative loan29,80026,20019,0008,000( 0 (( 0 (
Ending cash balance$3,000$3,000$3,000$3,000$12,200$27,000
e.
Assets
CashAccounts ReceivableInventoryTotal Current
Jan. $8,600$14,400$ 5,000$28,000
Feb. 13,0009,0006,50028,500
Mar. 9,2004,80011,50025,500
Apr. 3,0006,00015,50024,500
May3,0002,40022,50027,900
June3,0001,20030,50034,700
July3,00010,80030,50044,300
Aug. 3,00013,20028,50044,700
Sept. 3,00015,00025,00043,000
Oct. 3,00018,00019,00040,000
Nov. 12,20022,8009,00044,000
Dec. 27,00012,0008,00047,000
The instructor may wish to point out how current assets are at
relatively high levels and illiquid during June through October. In
November and particularly December, the asset levels remain high,
but they become increasingly more liquid as inventory diminishes
relative to cash.
6-5.Lizs Health Food Stores
a. Short-term financingMonthRate On Monthly BasisAmountActual
Interest
January8%.67% $8,000$ 53.60
February9%.75% $2,000$ 15.00
March12%1.00% $3,000$ 30.00
April15%1.25% $8,000$100.00
May12%1.00% $9,000$ 90.00
June12%1.00% $4,000$ 40.00
$328.60
b. Long-term financingMonthRate On Monthly BasisAmountActual
Interest
January12%1%$8,000$ 80.00
February12%1%$2,000$ 20.00
March12%1%$3,000$ 30.00
April12%1%$8,000$ 80.00
May12%1%$9,000$ 90.00
June12%1%$4,000$ 40.00
$340.00
Total dollar interest payments would be larger under the
long-term financing plan as described in part b.
6-6.
Lizs Health Food Stores (Continued)
Divide the total interest payments in part (a) of $328.60 by the
total amount of funds extended $34,000 and multiply by 12.
12 ( .966% = 11.59% annual rate
6-7. Proctor Micro-Computers Ltd.
Long-term rate$1,200,000 ( .095 ( 2 years =$228,000
Short-term rates$1,200,000 ( .0655 ( 1 year =$ 78,600
$1,200,000 ( .1095 ( 1 year =$131,400
$210,000
Using the short-term rates appears less costly.
6-8.Doris Daycare Centres Inc.
a.If Rates Are Constant$200,000 borrowed ( 10% per annum ( 3
years = $60,000
interest cost (long-term)
$200,000 borrowed ( 12% per annum ( 3 years = $72,000
interest cost (short-term)
$72,000 ( $60,000 = $12,000 interest savings
borrowing short-term
b.If Short-term Rates Change1st year$200,000 ( .10 =$20,000
2nd year$200,000 ( .15 =$30,000
3rd year$200,000 ( .18 =$36,000Total =$86,000
$86,000 $72,000 = $14,000 extra interest costs
borrowing short-term
6-9.Sherlock Homes
Long-term financing equals:
Permanent current assets
$1,500,000
Capital assets
2,000,000
$3,500,000
Short-term financing equals:
Temporary current assets
$1,000,000
Long-term interest expense =13% ( $3,500,000 =$ 455,000
Short-term interest expense = 8% ( $1,000,000 = 80,000Total
interest expense
$ 535,000
Earnings before interest and taxes
$ 960,000
Interest expense
535,000Earnings before taxes
$ 425,000
Taxes (40%)
170,000Earnings aftertaxes
$ 255,000
6-10.Sherlock Homes (Continued)Long-term interest expense = 8% (
$3,500,000 =$ 280,000
Short-term interest expense = 12% ( $1,000,000 = 120,000Total
interest expense
$ 400,000
Earnings before interest and taxes
$ 960,000
Interest expense
400,000Earnings before taxes
$ 560,000
Taxes (40%)
224,000Earnings aftertaxes
$ 336,000
The company has benefited because it is primarily financed by
long-term financing, and long-term rates are now much lower than
short-term rates, as rates have become inverted.
6-11. Collins Systems, Inc.
2nd printing of text has been changed (capital assets
$400,000)a.Temporary current assets$300,000
Permanent current assets200,000
Capital assets400,000Total assets$900,000
Conservative
% of
Interest
Interest
AmountTotal
Rate
Expense
$900,000 ( .80 = $720,000(.15=$108,000 Long-term
$900,000 ( .20 = $180,000(.10= 18,000 Short-term
Total interest charge
$126,000
Aggressive
% of
Interest
Interest
AmountTotal
Rate
Expense
$900,000 ( .30 = $270,000(.15=$ 40,500 Long-term
$900,000 ( .70 = $630,000(.10= 63,000 Short-term
Total interest charge
$103,500
b.
ConservativeAggressiveEBIT$180,000$180,000
Int126,000103,500EBT54,00076,500
Tax 40% 21,600 30,600EAT $32,400$45,900
c.Reversed:
Conservative
% of
Interest
Interest
AmountTotal
Rate
Expense
$900,000 ( .80 = $720,000(.10=$ 72,000 Long-term
$900,000 ( .20 = $180,000(.15= 27,000 Short-term
Total interest charge
$ 99,000
Aggressive
$900,000 ( .30 = $270,000(.10=$ 27,000 Long-term
$900,000 ( .70 = $630,000(.15= 94,500 Short-term
Total interest charge
$121,500
EarningsConservativeAggressiveEBIT$180,000$180,000
Int99,000121,500EBT81,00058,500
Tax 40% 32,400 23,400EAT $48,600$35,100
6-12.Lear, Inc.a.Current(permanent current=temporary current
assets
assets
assets
$800,000($350,000=$450,000
Long-term interest expense= 10% [$600,000 + .5 ($350,000)]
= 10%( ($775,000)
= $77,500
Short-term interest expense= 5% [$450,000 + .5 ($350,000)]
= 5% ( ($625,000)
= $31,250
Total interest expense= $77,500 + $31,250
= $108,750
Earnings before interest and taxes$200,000
Interest expense108,750Earnings before taxes$91,250
Taxes (30%)27,375
Earnings aftertaxes$ 63,875
b.Alternative financing plan
Long-term interest expense=10% [$600,000 + $350,000
+ .5 ($450,000)]
=10% ($1,175,000)
=$117,500
Short-term interest expense=5% [ .5 ($450,000)]
=5% (225,000)
=$11,250
Total interest expense=$117,500 + $11,250
=$128,750
Earnings before interest and taxes$200,000
Interest128,750
Earnings before taxes$ 71,250
Taxes (30%)21,375
Earnings aftertaxes$49,875
c.The alternative financing plan which calls for more financing
by high cost debt is more expensive and reduces aftertax income by
$14,000. However, we must not automatically reject this plan
because of its higher cost since it has less risk. The alternative
provides the firm with long-term capital which at times will be in
excess of its needs and invested in marketable securities. It will
not be forced to pay higher short-term rates on a large portion of
its debt when short-term rates rise and will not be faced with the
possibility of no short-term financing for a portion of its
permanent current assets when it is time to renew the short-term
loan.
6-13.Library assignment: Answers will vary with the state of the
economy.
6-14. 2 year security (4% + 5%)/2 =4.5%
3 year security(4% + 5% + 7%)/3 =5.33%
4 year security(4% + 5% + 7% + 9%)/4 =6.25%
or:
6-15.
2 year bond= 4%
2 year bond= (1st year bond + 2nd year bond) / 2
4%
= (6% + f2) / 2
f2
= 2%
Or:(1.04)2= (1.06)(1 + f2)
1 + f2
= (1.04)2 / 1.06
1 + f2
= 1.0204
f2
= .0204= 2.04%
6-16.
1 year rate= 5.11%
2 year rate= 5.18%
3 year rate= 5.22%
2 year rate
= (1st year rate + 2nd year rate) / 2
5.18%
= (5.11% + X) / 2
10.36%
= 5.11 + X
X
= 5.25%
Or:(1.0518)2= (1.0511)(1 + f2)
1 + f2
= (1.0518)2 / 1.0511
1 + f2
= 1.0525
f2
= .0525= 5.25%
3 year rate= (1st year rate + 2nd year rate + 3rd year rate) /
3
5.22%= (5.11% + 5.25 + f3) / 3
15.66%= 10.36 + f3X
= 5.30%
Or:(1.0522)3= (1.0511)(1.0525)(1 + f3)
1 + f3
= (1.0522)3 / (1.0511)(1.0525)
1 + f3
= 1.0530
f3
= .0530= 5.30%
6-17.
1 year rate= 7.91%
2 year rate= 8,54%
3 year rate= 9.13%
2 year rate
= (1st year rate + 2nd year rate) / 2
8.54%
= (7.91% + X) / 2
17.08%
= 7.91 + X
X
= 9.17%
Or:(1.0854)2= (1.0791)(1 + f2)
1 + f2
= (1.0854)2 / 1.0791
1 + f2
= 1.0917
f2
= .0917= 9.17%
3 year rate= (1st year rate + 2nd year rate + 3rd year rate) /
3
9.13%= (7.91% + 9.17% + f3) / 3
27.39%= 17.08% + f3X
= 10.31%
Or:(1.0913)3= (1.0791)(1.0917)(1 + f3)
1 + f3
= (1.0913)3 / (1.0791)(1.0917)
1 + f3
= 1.1032
f3= .1032= 10.32%
6-18.Austin Electronics
Expected
State of EconomySalesProbabilityOutcome
Strong$900,000.15$135,000
Steady650,000.60390,000
Weak 375,000.25 93,750
Expected level of sales =$618,7506-19.Hogan Surgical Instruments
Companya.Most aggressiveLow liquidity$2,000,000 ( 18% =
$360,000
Short-term financing$2,000,000 ( 10% = 200,000Anticipated
return
$160,000
b.Most conservativeHigh liquidity$2,000,000 ( 14% = $280,000
Long-term financing$2,000,000 ( 12% = 240,000Anticipated
return
$ 40,000
c.
Moderate approachLow liquidity$2,000,000 ( 18% = $360,000
Long-term financing$2,000,000 ( 12% = 240,000
$120,000
or
High liquidity$2,000,000 ( 14% = $280,000
Short-term financing$2,000,000 ( 10% =
200,000
$ 80,000
d.You may not necessarily select the plan with the highest
return. You must also consider the risk inherent in the plan. Of
course, some firms are better able to take risks than others. The
ultimate concern must be for maximizing the overall valuation of
the firm through a judicious consideration of risk-return
options.
6-20.Gale Force Corporation
(Working Capital - Level vs., Seasonal Production)
Purpose:This case forces the student to view the impact of level
versus seasonal production on inventory levels, bank loan
requirements, and profitability. It also considers the efficiencies
( or inefficiencies) covered by the different production plans. The
computations in the case are parallel Tables 1 to 5 in the text,
with the only difference being that seasonal production rather than
level production is being utilized. The case allows the student to
properly track the movement of cash flow through the production
process.
a.New Tables 2 through 5, with Tim's suggestion implemented, are
shown in the following pages. Observe that the inventory level is
now constant at 400 units or $800,000 a month because all units
produced are sold. As a side point, note that there may be no
apparent need now to maintain the 400 units a month in inventory
that were on hand at the start of the cycle. The inventory level
could be reduced to the level that management feels would be
sufficient to cover emergencies (or maybe to zero, which is what
the Japanese do in a "just-in-time" production concept).
Though not required, you may wish to refer to the old and new
Table 4 to make a special point. Note that Tims suggestion causes
inventory balances to decrease over the time period and total
current assets to fluctuate less, but the same balances occur at
the end of September for inventory and total current assets.
b. New Table 5 shows the new cumulative loan balances and the
interest expenses incurred each month. Under the old system (level
production), total interest expense (at 1% a month on the
cumulative loan balance) was $254,250. Under the proposed system it
decreases to $50,750 for a savings of $203,500.
c.The first step is to compute total sales. Using the second row
of Table 3 (either the old or new table), the total is $14,400,000.
With an added expense burden of .5%, expenses will go up by
$72,000. This is still far less than the interest savings of
$203,500 computed in question 2, so the seasonal production plan is
justified. ($203,500 ( $72,000 = $131,500). Please note that the
values are assumed to be computed on a pretax basis.
Table 2Production schedule and inventory (seasonal
production)
Beginning
Inventory +ProductionSales= Ending
Inventory
Oct. 400+ 150 150= 4001
Nov. 400
75 75 400
Dec. 400
25 25 400
Jan. 400
0 0 400
Feb.400
0 0 400
Mar.400
300 300 400
Apr.400
500 500 400
May 400
1,000 1,000 400
June 400
1,000 1,000 400
July400
1,000 1,000 400
Aug.400
500 500 400
Sept. 400
250 250 400
1Inventory ($2,000 per unit) x 400= $800,000
Table 3Cash Receipts Schedule:(sales price = $3,000/ unit) (In
thousands)
Oct.Nov.Dec.Jan.Feb.Mar.
Sales forecast150752500300
Sales (in dollars)$450.0$ 225.0$75.0- 0 -- 0 -$ 900.0
50% Cash sales 225.0 112.5 37.5- 0 -- 0 -450.0
50% Prior month=s sales 375.0225.0 112.5 37.5 - 0 - - 0 -
Total receipts$600.0$ 337.5$ 150.0$ 37.5$ - 0 -$ 450.0
*based on September sales of $750,000
Apr.MayJuneJulyAug.Sept.
Sales forecast5001,0001,0001,000500250
Sales (in dollars)$1,500.0$3,000.0$3,000.0$
3,000.0$1,500.0$750.0
50% Cash sales 750.01,500.01,500.01,500.0750.0375.0
50% Prior month=s sales450.0750.0 1,500.0 1,500.0 1,500.0
750.0
Total
receipts$1,200.0$2,250.0$3,000.0$3,000.0$2,250.0$1,125.0
Table 3Cash Payments Schedule: (Production costs = $2,000/ unit)
(In thousands)
Oct.Nov.Dec.Jan.Feb.Mar.
Production in units150752500300
Production costs$ 300.0$ 150.0$ 50.0$ 0$ 0$ 600.0
Overhead200.0200.0200.0200.0200.0200.0
Dividends & Interest
Taxes150.0
$ 150.0
Total payments$ 650.0$ 350.0$ 250.0$ 350.0$ 200.0$ 800.0
Apr.MayJuneJulyAug.Sept.
Production in units5001,0001,0001,000500250
Production costs$1,000.0$2,000.0$2,000.0$2,000.0$1,000.0$
500.0
Other cash payments200.0200.0200.0200.0200.0200.0
Dividends & Interest
1,000.0
Taxes$ 150.0
300.0
Total payments$1,350.0$2,200.0$2,200.0$2,500.0$2,200.0$
700.0
Table 3Cash Budget: (minimum required balance = $125,000) (In
thousands)
Oct.Nov.Dec.Jan.Feb.Mar.
Cash flow$ -50.0$ -12.5$ -100.0$ -312.5$ -200.0$ -350.0
Beginning cash125.0125.0125.0125.0125.0125.0
Cumulative cash balance 75.0 112.525.0-187.5 -75.0 -225.0
Monthly loan or (repayment)50.0 12.5100.0312.5200.0350.0
Cumulative loan50.062.5162.5475.0675.01,025.0
Ending cash balance$ 125.0$ 125.0$ 125.0$ 125.0$ 125.0$
125.0
Apr.MayJuneJulyAug.Sept.
Cash flow$ -150.0$ 50.0$ 800.0 $ 500.0 $ 50.0 $ 425.0
Beginning cash125.0 125.0125.0125.0300.0350.0
Cumulative cash balance-25.0175.0 925.0 625.0 350.0 775.0
Monthly loan or (repayment)150.0-50.0-800.0-325.0- 0 -- 0 -
Cumulative loan1,175.01,125.0325.0- 0 -- 0 -- 0 -
Ending cash balance$ 125.0$ 125.0$ 125.0 $ 300.0 $ 350.0$
775.0
Table 4Total Current Assets, First Year (thousands)
Cash *Accounts ReceivableInventoryTotal Current
Oct. $125.0$ 225.0$ 800$1,150.0
Nov. 125.0112.58001,037.5
Dec. 125.037.5800962.5
Jan. 125.00800925.0
Feb.125.00800925.0
Mar.125.0450.08001,375.0
Apr.125.0750.08001,675.0
May 125.01,500.08002,425.0
June 125.01,500.08002,425.0
July 300.01,500.08002,600.0
Aug. 350.0750.08001,900.0
Sept. 775.0375.08001,950.0
*Equals 50 percent of monthly sales
Table 5Cumulative Loan Balance and Interest Expense (12% per
year / 1% per month)
Oct.Nov.Dec.Jan.Feb.Mar.
Cumulative loan
(thousands)$50.0$62.5$162.5$475.0$675.0$1,025.0
Interest expense at 12%$ 500$ 625$1,625$4,750$6,750$10,250
Apr.MayJuneJulyAug.Sept.
Cumulative loan$1,175.0$1,125.0$325.0- 0 -- 0 -- 0 -
Ending cash balance$11,750$11,250$3,250 $ 0 $ 0$ 0
Interest rate= Prime (8%) + 4%= 12%
Total interest expense for the year
= $50,750
EMBED Equation.3
EMBED Equation.3
EMBED Equation.3
205Foundations of Fin. Mgt.5/E Cdn.( Block, Hirt, Short
_1003665449.unknown
_1003665471.unknown
_1003665500.unknown
