chap 2 solution

7/25/2019 Chap 2 Solution

1/33

Chapter 6

Discussion Questions

6-1. Explain how rapidly expanding sales can drain the cash resources of a firm.

Rapidly expanding sales will require a buildup in assets to support the growth.In particular, more and more of the increase in current assets will be permanentin nature. non-liquidating aggregate stoc! of current assets will be necessaryto allow for floor displays, multiple items for selection, and other purposes. llof these "asset# in$estments can drain the cash resources of the firm.

6-%. &iscuss the relati$e $olatility of short- and long-term interest rates.

'igure 6-1( shows the long-run $iew of short- and long-term interest rates.

)ormally, short-term rates are much more $olatile than long-term rates.

6-*. +hat is the significance to wor!ing capital management of matching sales andproduction

If sales and production can be matched, the le$el of in$entory and the amountof current assets needed can be !ept to a minimum therefore, lower financingcosts will be incurred. atching sales and production has the ad$antage ofmaintaining smaller amounts of current assets than le$el production, andtherefore less financing costs are incurred. /owe$er, if sales are seasonal orcyclical, wor!ers will be laid off in a declining sales climate and machinery

0fixed assets will be idle. /ere lies the tradeoff between le$el and seasonalproduction2 'ull utili3ation of fixed assets with s!illed wor!ers and morefinancing of current assets $ersus unused capacity, training and retrainingwor!ers, with lower financing for current assets.

6-4. /ow is a cash budget used to help manage current assets

cash budget helps minimi3e current assets by pro$iding a forecast of inflowsand outflows of cash. It also encourages the de$elopment of a schedule as towhen in$entory is produced and maintained for sales 0production schedule, andaccounts recei$ables are collected. 5he cash budget allows us to forecast thele$el of each current asset and the timing of the buildup and reduction of each.

6-. "5he most appropriate financing pattern would be one in which asset buildupand length of financing terms is perfectly matched.# &iscuss the difficultyin$ol$ed in achie$ing this financing pattern.

7nly a financial manager with unusual insight and timing could design a plan inwhich asset buildup and the length of financing terms are perfectly matched.7ne would need to !now exactly what current assets are temporary and whichones are permanent. 'urthermore, one is ne$er quite sure how much short-term

86-1


2/33

or long-term financing is a$ailable at all times. E$en if this were !nown, itwould be difficult to change the financing mix on a continual basis.

6-6. 9y using long-term financing to finance part of temporary current assts, a firmmay ha$e less ris! but lower returns than a firm with a normal financing plan.

Explain the significance of this statement.

9y establishing a long-term financing arrangement for temporary current assets,a firm is assured of ha$ing necessary funding in good times as well as bad, thuswe say there is low ris!. /owe$er, long-term financing is generally moreexpensi$e than short-term financing and profits may be lower than those whichcould be achie$ed with a synchroni3ed or normal financing arrangement fortemporary current assets.

6-:. firm that uses short-term financing methods for a portion of permanentcurrent assets is assuming more ris! but expects higher returns than a firm with

a normal financing plan. Explain.

9y financing a portion of permanent current assets on a short-term basis, werun the ris! of inadequate financing in tight money periods. /owe$er, sinceshort-term financing is less expensi$e than long-term funds, a firm tends toincrease its profitability o$er the long run 0assuming it sur$i$es. In answer tothe preceding question, we stressed less ris! and less return here the emphasisis on ris! and high return.

6-;. +hat does the termstructure of interest ratesindicate

5he term structure of interest rates shows the relati$e le$el of short-term andlong-term interest rates at a point in time on iquidity premium theory, the mar!et segmentation theory, and the expectationstheory.

5he liquidity premium theory indicates that long-term rates should be higherthan short-term rates. 5his premium of long-term rates o$er short-term ratesexists because short-term securities ha$e greater liquidity, and therefore higherrates ha$e to be offered to potential long-term bond buyers to entice them tohold these less liquid and more price sensiti$e securities.

5he mar!et segmentation theory states that 5reasury securities are di$ided intomar!et segments by the $arious financial institutions in$esting in the mar!et.5he changing needs, desires, and strategies of these in$estors tend to stronglyinfluence the nature and relationship of short- and long-term rates.

86-%


3/33

5he expectations hypothesis maintains that the yields on long-term securitiesare a function of short-term rates. 5he result of the hypothesis is that whenlong-term rates are much higher than short-term rates, the mar!et is saying thatit expects short-term rates to rise. ?on$ersely, when long-term rates are lower

than short-term rates, the mar!et is expecting short-term rates to fall.

6-1(. 8ince the middle 1=6(s, corporate liquidity has been declining. +hat reasonscan you gi$e for this trend

5he decrease is liquidity can be traced in part to more efficient in$entorymanagement such as @ust-in-time in$entory and point of sales terminals thatpro$ide better in$entory control. 5he decline in wor!ing capital can also beattributed to electronic cash flow transfer systems, and the ability to sellaccounts recei$ables through securiti3ation of assets 0this is more fullyexplained in the next chapter. It might also be that management is simply

willing to ta!e more liquidity ris! as interest rates declined.

86-*


4/33

Chapter 6

Problems

1. AaryBs Cipe and 8teel company expects sales next year to be D;((,((( if the economy isstrong, D((,((( if the economy is steady, and D*(,((( if the economy is wea!. Aarybelie$es there is a %( percent probability the economy will be strong, a ( percentprobability of a steady economy, and a *( percent probability of a wea! economy.+hat is the expected le$el of sales for next year

6-1. Solution:

Garys Pipe and Steel Company

State of

conomy Sales Probability

!pected

"utcome

8trong D;((,((( .%( D16(,(((

8teady ((,((( .( %(,(((

+ea! *(,((( .*( 1(,(((

Expected le$el of sales D1,(((

86-4


5/33

%. )ile Ri$erboat ?o., a ma@or boat building company highly sensiti$e to the economy,expects profits next year to be D%,(((,((( if the economy is strong, D1,%((,((( if theeconomy is steady, and minus D4((,((( if the economy is wea!. r. )ile belie$es there isa *( percent probability of a strong economy, a 4( percent probability of a steady economy,and a *( percent probability of a wea! economy. +hat is the expected $alue of profits for

next year

6-#. Solution:

$ile %i&erboat Co.

State of

conomy Profits Probability

!pected

"utcome

8trong %,(((,((( .*( D6((,(((

8teady 1,%((,((( .4( 4;(,(((

+ea! F4((,((( .*( F1%(,(((

Expected le$el of profits D=6(,(((

*. 5obin 8upplies ?ompany expects sales next year to be D((,(((. In$entory and accountsrecei$able will increase D=(,((( to accommodate this sales le$el. 5he company has asteady profit margin of 1% percent with a 4( percent di$idend payout. /ow much external

financing will 5obin 8upplies ?ompany ha$e to see! ssume there is no increase inliabilities other than that which will occur with the external financing.

6-'. Solution:

(obin Supplies Company

D((,((( 8ales .1% Crofit margin 6(,((( )et income

F %4,((( &i$idends 04(GD *6,((( Increase in retained earnings

D =(,((( Increase in assetsF *6,((( Increase in retained earningsD 4,((( External funds needed

86-


6/33

4. 8hamroc! &iamonds expects sales next year to be D*,(((,(((. In$entory and accountsrecei$able will increase D4%(,((( to accommodate this sales le$el. 5he company has asteady profit margin of 1( percent with a % percent di$idend payout. /ow much externalfinancing will the firm ha$e to see!

6-). Solution:

Shamroc* Diamonds

D*,(((,((( 8ales .1( Crofit margin *((,((( )et income :,((( &i$idends 0%GD %%,((( Increase in retained earnings

4%(,((( Increase in assets

F %%,((( Increase in retained earningsD 1=,((( External funds needed

. Electric ?hair and 5able ?o. expects sales next year to be D1(,(((,(((. In$entory andaccounts recei$able will increase by D1,4((,((( and accounts payable will increase byD*((,(((. 5he company has a profit margin of = percent and pays out *( percent of profitsin di$idends. /ow much external financing will be necessary

ssume there is no increase in liabilities other than that which will occur with the external

financing.

6-+. Solution:

lectric Chair and (able Company

D1(,(((,((( 8ales .(= Crofit margin =((,((( )et income

%:(,((( &i$idends 0*(G 6*(,((( Increase in retained earnings

1,4((,((( Increase in assets F %((,((( Increase in accounts payable F 6*(,((( Increase in retained earningsD :(,((( External funds needed

86-6


7/33

6. 'ashionBs ?lothiers sells scar$es that are $ery popular in the fall-winter season.


8/33

6-6. 0Continued

b. ndin/n&entory

Cost per

nit 023

/n&entory

,inancin Cost

7ctober D*,((( D%1,((( D1,6;(

)o$ember 4,((( %;,((( %,%4(

&ecember 1,((( :,((( 6(

Hanuary ( ( (

D4,4;(

86-;


9/33

:. Crocter icro-?omputers, Inc., requires D1,%((,((( in financing o$er the next two years.5he firm can borrow the funds for two years at =. percent interest per year. r. Crocterdecides to do economic forecasting and determines that if he utili3es short-term financinginstead, he will pay 6. percent interest in the first year and 1(.= percent interest in thesecond year. &etermine the total two-year interest cost under each plan. +hich plan is

less costly

6-3. Solution:

Procter-4ini-Computers5 /nc.

?ost of 5wo Jear 'ixed ?ost 'inancing

D1,%((,((( borrowed K =.G per annum K % years D%%;,((( interest

?ost of 5wo Jear Lariable 8hort-term 'inancing

1st

year D1,%((,((( K 6.G per annum D :;,6(( interest cost%ndyear D1,%((,((( K 1(.=G per annum D1*1,4(( interest cost

D%1(,((( two-year total5he short-term plan is less costly.

86-=


10/33

;. 8auer 'ood ?ompany has decided to buy a new computer system with an expected life ofthree years. 5he cost is D1(,(((. 5he company can borrow D1(,((( for three years at1( percent annual interest or for one year at ; percent annual interest.

/ow much would 8auer 'ood ?ompany sa$e in interest o$er the three-year life of thecomputer system if the one-year loan is utili3ed and the loan is rolled o$er 0reborrowed

each year at the same ; percent rate ?ompare this to the 1( percent three-year loan. +hatif interest rates on the ; percent loan go up to 1* percent in year % and 1; percent in year *+hat would be the total interest cost compared to the 1( percent, three-year loan

6-. Solution:

Sauer ,ood Company

If Rates re ?onstant

D1(,((( borrowed K ;G per annum K * years D*6,((( interest cost

D1(,((( borrowed K 1(G per annum K * years D4,((( interest cost

D4,((( F D*6,((( D=,((( interest sa$ings borrowingshort-term

If 8hort-term Rates ?hange

1styear D1(,((( K .(; D1%,(((%ndyear D1(,((( K .1* D1=,((*rdyear D1(,((( K .1; D%:,(((

5otal D;,((D;,(( F D4,((( D1*,(( extra interest costs

borrowing short-term.

86-1(


11/33

=. ssume 8tratton /ealth ?lubs, Inc., has D*,(((,((( in assets. If it goes with a low liquidityplan for the assets, it can earn a return of %( percent, but with a high liquidity plan, thereturn will be 1* percent. If the firm goes with a short-term financing plan, the financingcosts on the D*,(((,((( will be 1( percent, and with a long-term financing plan, thefinancing costs on the D*,(((,((( will be 1% percent. 0Re$iew 5able 6-11 for parts a, b, and

cof this problem.a. ?ompute the anticipated return after financing costs with the most aggressi$e asset-

financing mix.

b. ?ompute the anticipated return after financing costs with the most conser$ati$e asset-financing mix.

c. ?ompute the anticipated return after financing costs with the two moderate approachesto the asset-financing mix.

d. +ould you necessarily accept the plan with the highest return after financing costs9riefly explain.

6-7. Solution:

Stratton 8ealth Clubs5 /nc.

a. 4ost aressi&e

>ow liquidityMhigh return D*,(((,((( K %(G D6((,(((8hort-term financing F*,(((,((( K 1(G F*((,(((nticipated return D*((,(((

b. 4ost conser&ati&e

/igh liquidityMlow return D*,(((,((( K 1*G D*=(,(((>ong-term financing F*,(((,((( K 1%G F*6(,(((nticipated return D *(,(((

c. 4oderate approach

>ow liquidity D*,(((,((( K %(G D6((,(((>ong-term financing F*,(((,((( K 1%G F*6(,(((

D%4(,(((

7R

/igh liquidity D*,(((,((( K 1*G D*=(,(((8hort-term financing F*,(((,((( K 1(G F*((,(((

D =(,(((

86-11


12/33

6-7. 0Continued

d. Jou may not necessarily select the plan with the highestreturn. Jou must also consider the ris! inherent in the plan.

7f course, some firms are better able to ta!e ris!s thanothers. 5he ultimate concern must be for maximi3ing theo$erall $aluation of the firm through a @udiciousconsideration of ris!-return options.

1(. ssume that tlas 8porting Aoods, Inc., has D;((,((( in assets. If it goes with a low-

liquidity plan for the assets, it can earn a return of 1 percent, but with a high-liquidity planthe return will be 1% percent. If the firm goes with a short-term financing plan, thefinancing costs on the D;((,((( will be ; percent, and with a long-term financing plan, thefinancing costs on the D;((,((( will be 1( percent. 0Re$iew 5able 6-11 for parts a, b, and cof this problem.

a. ?ompute the anticipated return after financing costs with the most aggressi$e asset-financing mix.

b. ?ompute the anticipated return after financing costs with the most conser$ati$e asset-financing mix.

c. ?ompute the anticipated return after financing costs with the two moderate approaches

to the asset-financing mix.d. If the firm used the most aggressi$e asset-financing mix described in part aand had the

anticipated return you computed for part a, what would earnings per share be if the taxrate on the anticipated return was *( percent and there were %(,((( shares outstanding

e. )ow assume the most conser$ati$e asset-financing mix described in part bwill beutili3ed. 5he tax rate will be *( percent. lso assume there will only be ,((( sharesoutstanding. +hat will earnings per share be +ould it be higher or lower than theearnings per share computed for the most aggressi$e plan computed in part d

86-1%


13/33

6-19. Solution:

tlas Sportin Goods5 /nc.

a. 4ost aressi&e

>ow liquidity D;((,((( K 1G D1%(,(((8hort-term financing ;((,((( K ;G F64,(((nticipated return D 6,(((

b. 4ost conser&ati&e

/igh liquidity D;((,((( K 1%G D =6,(((>ong-term financing ;((,((( K 1(G F;(,(((nticipated return D 16,(((

c. 4oderate approach

>ow liquidity D;((,((( K 1G D1%(,(((>ong-term financing ;((,((( K 1(G F;(,(((nticipated return D 4(,(((

-"%-

/igh liquidity D;((,((( K 1%G D =6,(((

8hort-term financing ;((,((( K ;G F64,(((nticipated return D *%,(((

d. nticipated return D 6,(((F taxes 0*(G 16,;((Earnings after taxes *=,%((8hares %(,(((Earnings per share D1.=6

e. nticipated return D 16,(((

Ftaxes 0*(G 4,;((Earnings after taxes 11,%((8hares ,(((Earnings per share D%.%4

It is higher 0D%.%4 $s. D1.=6

86-1*


14/33

11. ?olter 8teel has D4,%((,((( in assets.

5emporary current assets......................... D1,(((,(((Cermanent current assets.......................... %,(((,((('ixed assets.............................................. 1,%((,(((

5otal assets......................................... D4,%((,(((

8hort-term rates are ; percent. >ong-term rates are 1* percent. Earnings before interest andtaxes are D==6,(((. 5he tax rate is 4( percent.

If long-term financing is perfectly matched 0synchroni3ed with long-term asset needs,and the same is true of short-term financing, what will earnings after taxes be 'or agraphical example of perfectly matched plans, see 'igure 6-.

6-11. Solution:

Colter Steel>ong-term financing equals2

Cermanent current assets D%,(((,((('ixed assets 1,%((,(((

D*,%((,(((

8hort-term financing equals2

5emporary current assets D1,(((,(((

>ong-term interest expense 1*G K D*,%((,((( D 416,(((8hort-term interest expense ;G K 1,(((,((( ;(,(((5otal interest expense D 4=6,(((

Earnings before interest and taxes D ==6,(((Interest expense 4=6,(((

Earnings before taxes D ((,(((

5axes 04(G %((,(((Earnings after taxes D *((,(((

86-14


15/33

1%. In problem 11, assume the term structure of interest rates becomes in$erted, with short-term rates going to 11 percent and long-term rates 4 percentage points lower than short-term rates.

If all other factors in the problem remain unchanged, what will earnings after taxes be

6-1#. Solution:

Colter Steel 0Continued

>ong-term interest expense :G K D*,%((,((( D%%4,(((8hort-term interest expense 11G K 1,(((,((( 11(,(((5otal interest expense D**4,(((

Earnings before interest and taxes D==6,(((

Interest expense **4,(((Earnings before taxes D66%,(((5axes 04(G %64,;((

Earnings after taxes D*=:,%((

86-1


16/33

1*. Auardian, Inc., is trying to de$elop an asset-financing plan. 5he firm has D4((,((( intemporary current assets and D*((,((( in permanent current assets. Auardian also hasD((,((( in fixed assets. ssume a tax rate of 4( percent.

a. ?onstruct two alternati$e financing plans for Auardian. 7ne of the plans should beconser$ati$e, with : percent of assets financed by long-term sources, and the other

should be aggressi$e, with only 6.% percent of assets financed by long-term sources.5he current interest rate is 1 percent on long-term funds and 1( percent on short-termfinancing.

b. Ai$en that AuardianBs earnings before interest and taxes are D%((,(((, calculateearnings after taxes for each of your alternati$es.

c. +hat would happen if the short-and long-term rates were re$ersed

6-1'. Solution:

Guardian5 /nc.

a. 5emporary current assets D 4((,(((Cermanent current assets *((,((('ixed assets ((,(((5otal assets D1,%((,(((

Conser&ati&e

G of Interest Interestmount 5otal Rate Expense

D1,%((,((( K .: D=((,((( K.1 D1*,((( >ong-termD1,%((,((( K .% D*((,((( K.1( *(,((( 8hort-term

5otal interest charge D16,(((

ressi&e

D1,%((,((( K .6% D6:,((( K .1 D1(1,%( >ong-termD1,%((,((( K .4*: D%,((( K .1( %,(( 8hort-term

5otal interest charge D1*,:(

86-16


17/33

6-1'. 0Continued

b. Conser&ati&e ressi&eE9I5 D%((,((( D%((,(((

FInt 16,((( 1*,:(E95 *,((( 46,%(5ax 4(G 14,((( 1;,((E5 D %1,((( D %:,:(

c. Re$ersed2

Conser&ati&e

D1,%((,((( K .: D=((,((( K.1( D =(,((( >ong-termD1,%((,((( K .% D*((,((( K.1 4,((( 8hort-term5otal interest charge D1*,(((

ressi&e

D1,%((,((( K .6% D6:,((( K.1( D6:,(( >ong-termD1,%((,((( K .4*: D%,((( K.1 :;,:( 8hort-term

5otal interest charge D146,%(

%e&ersed Conser&ati&e ressi&e

E9I5 D%((,((( D%((,(((FInt 1*,((( 146,%(E95 6,((( *,:(5ax 4(G %6,((( %1,((E5 D *=,((( D *%,%(

86-1:


18/33

14. >ear, Inc., has D;((,((( in current assets, D*(,((( of which are considered permanentcurrent assets. In addition, the firm has D6((,((( in$ested in fixed assets.

a. >ear wishes to finance all fixed assets and half of its permanent current assets withlong-term financing costing 1( percent. 8hort-term financing currently costs percent.>earBs earnings before interest and taxes are D%((,(((. &etermine >earBs earnings after

taxes under this financing plan. 5he tax rate is *( percent.b. s an alternati$e, >ear might wish to finance all fixed assets and permanent current

assets plus half of its temporary current assets with long-term financing. 5he sameinterest rates apply as in part a. Earnings before interest and taxes will be D%((,(((.+hat will be >earBs earnings after taxes 5he tax rate is *( percent.

c. +hat are some of the ris!s and cost considerations associated with each of thesealternati$e financing strategies

6-1). Solution:

;ear5 /nc.a.

?urrent assets F permanent current assets temporary currentassets

D;((,((( F D*(,((( D4(,(((

8hort-term interest expense G ND4(,((( O 0D*(,(((P G 0D6%,((( D*1,%(

>ong-term interest expense 1(G ND6((,((( O0D*(,(((P 1(G 0D::,((( D::,((

5otal interest expense D*1,%( D::,(( D1(;,:(

Earnings before interest and taxes D%((,((( Interest expense 1(;,:(Earnings before taxes D =1,%( 5axes 0*(G %:,*:Earnings after taxes D 6*,;:

86-1;


19/33

6-1). 0Continued

b. lternati$e financing plan

8hort-term interest expense G NO 0D4(,(((P G 0D%%,((( D11,%(

>ong-term interest expense 1(G ND6((,((( D*(,((( O 0D4(,(((P 1(G 0D1,1:,((( D11:,((

5otal interest expense D11,%( D11:,((D1%;,:(

Earnings before interest and taxes D%((,(((Interest expense 1%;,:(Earnings before taxes D :1,%(5axes 0*(G %1,*:Earnings after taxes D 4=,;:

c. 5he alternati$e financing plan which calls for more financingby high-cost debt is more expensi$e and reduces aftertaxincome by D14,(((. /owe$er, we must not automaticallyre@ect this plan because of its higher cost since it has less ris!.5he alternati$e pro$ides the firm with long-term capitalwhich at times will be in excess of its needs and in$ested inmar!etable securities. It will not be forced to pay highershort-term rates on a large portion of its debt when short-termrates rise and will not be faced with the possibility of no

short-term financing for a portion of its permanent currentassets when it is time to renew the short-term loan.

86-1=


20/33

1.


21/33

6-16. Solution:

4odern (ombstones

a. 8hort-term financing

4onth %ate

"n 4onthly


22/33

1:. In problem 16, what long-term interest rate would represent a brea!-e$en point betweenusing short-term financing as described in part aand long-term financing /int2 &i$ide theinterest payments in 16aby the amount of total funds pro$ided for the six months andmultiply by 1%.

6-13. Solution:

4odern (ombstones 0Continued

&i$ide the total interest payments in part 0a of D:(.%( by thetotal amount of funds extended D:;,((( 0D%(,((( 6,((( ;,((( 1(,((( %%,((( 1%,((( and multiply by 1%.

interest D:(.%(.=(4G monthly rate

principal D:;,(((

= =

1% .=(4G 1(.;4;G annual rate =

1;. 8herwin Caperboard ?ompany expects to sell 6(( units in Hanuary, :(( units in 'ebruary,and 1,%(( units in arch. HanuaryBs ending in$entory is ;(( units. Expected sales for thewhole year are 1%,((( units. 8herwin has decided on a le$el production schedule of 1,(((units 01%,((( unitsM1% months 1,((( units per month. +hat is the expected end-of-monthin$entory for Hanuary, 'ebruary, and arch 8how the beginning in$entory, production,and sales for each month to arri$e at ending in$entory.

9eginning Croduction Ending 8ales

in$entory 0le$el in$entory+ =

6-1. Solution:

Sher=in Paperboard Company

9eginning Croduction EndingIn$entory 0le$el F 8ales In$entory

Hanuary ;(( 1,((( 6(( 1,%(('ebruary 1,%(( 1,((( :(( 1,((

arch 1,(( 1,((( 1,%(( 1,*((

86-%%


23/33

1=. 8harpe ?omputer Araphics ?orporation has forecasted the following monthly sales2

Hanuary.............. D;(,((( Huly.............. D *(,((('ebruary............ :(,((( ugust......... *1,(((arch................ 1(,((( 8eptember. . . 4(,(((

pril.................. 1(,((( 7ctober........ :(,(((ay................... 1,((( )o$ember.... =(,(((Hune................... %(,((( &ecember.... 11(,(((

5otal annual sales D:6,(((

5he firm sells its graphic forms for D per unit, and the cost to produce the forms is D%per unit. le$el production policy is followed. Each monthBs production is equal to annualsales 0in units di$ided by 1%.

7f each monthBs sales, *( percent are for cash and :( percent are on account. llaccounts recei$able are collected in the month after the sale is made.

a. ?onstruct a monthly production and in$entory schedule in units. 9eginning in$entoryin Hanuary is 1,((( units. 0)ote2 5o do part a, you should wor! in terms of units ofproduction and units of sales.

b. Crepare a monthly schedule of cash receipts. 8ales in the &ecember before the planningyear are D=(,(((. +or! part busing dollars.

c. &etermine a cash payments schedule for Hanuary through &ecember. 5he productioncosts of D% per unit are paid for in the month in which they occur. 7ther cash payments,besides those for production costs, are D*(,((( per month.

d. Crepare a monthly cash budget for Hanuary through &ecember. 5he beginning cashbalance is D,((( and that is also the minimum desired.

86-%*


24/33

6-17. Solution:

Sharpe Computer Graphics Corporation

a. Croduction and in$entory schedule in units

9eginningIn$entory Croduction1 F8ales%

EndingIn$entory

Hanuary 1,((( =,6(( 16,((( ;,6((

'ebruary ;,6(( =,6(( 14,((( 4,%((

arch 4,%(( =,6(( %,((( 11,;((

pril 11,;(( =,6(( %,((( 1=,4((

ay 1=,4(( =,6(( *,((( %6,(((Hune %6,((( =,6(( 4,((( *1,6((

Huly *1,6(( =,6(( 6,((( *,%((

ugust *,%(( =,6(( 6,%(( *;,6((

8eptember *;,6(( =,6(( ;,((( 4(,%((

7ctober 4(,%(( =,6(( 14,((( *,;((

)o$ember *,;(( =,6(( 1;,((( %:,4((

&ecember %:,4(( =,6(( %%,((( 1,(((

15otal annual sales D:6,((( D:6,(((MD per unit 11,%(( units 11,%(( unitsM1% months =,6(( per month%onthly dollar salesMD price unit sales

86-%4


25/33

6-17. 0Continued

b.Cash Receipts Schedule

>an. ,eb. 4ar. pr. 4ay >une

8ales 0in dollars D;(,((( D:(,((( D1(,((( D1(,((( D1,((( D%(,(((*(G ?ash sales %4,((( %1,((( *,((( *,((( 4,(( 6,(((

:(G Crior monthBs sales 6*,(((Q 6,((( 4=,((( :,((( :,((( 1(,((

5otal cash receipts D;:,((( D::,((( D%,((( D1(,((( D11,(( D16,((

Qbased on December sales of 2795999

>uly u. Sept. "ct. $o&. Dec.

8ales 0in dollars D*(,((( D*1,((( D4(,((( D:(,((( D=(,((( D11(,(((

*(G ?ash sales =,((( =,*(( 1%,((( %1,((( %:,((( **,(((:(G Crior monthBs sales 14,((( %1,((( %1,:(( %;,((( 4=,((( 6*,(((

5otal cash receipts D%*,((( D*(,*(( D**,:(( D4=,((( D:6,((( D =6,(((

86-%


26/33

6-17. 0Continued

c.?ash Cayments 8chedule

Constant production


=,6(( units K D% D1=,%(( D1=,%(( D1=,%(( D1=,%(( D1=,%(( D1=,%((

7ther cash payments *(,((( *(,((( *(,((( *(,((( *(,((( *(,(((

5otal cash payments D4=,%(( D4=,%(( D4=,%(( D4=,%(( D4=,%(( D4=,%((


=,6(( units K D% D1=,%(( D1=,%(( D1=,%(( D1=,%(( D1=,%(( D1=,%((

7ther cash payments *(,((( *(,((( *(,((( *(,((( *(,((( *(,(((

5otal cash payments D4=,%(( D4=,%(( D4=,%(( D4=,%(( D4=,%(( D4=,%((

86-%6


27/33

6-17. 0Continued

d.Cash Budget


)et cash flow D*:,;(( D%:,;(( D %,;(( 0D*=,%(( 0D*:,:(( 0D*%,:((

9eginning cash ,((( 4%,;(( :(,6(( :*,4(( *4,%(( ,(((

?umulati$e cash balance 4%,;(( :(,6(( :*,4(( *4,%(( 0*,(( 0%:,:((onthly loan or 0repayment -(- -(- -(- -(- ;,(( *%,:((

?umulati$e loan -(- -(- -(- -(- ;,(( 41,%((Ending cash balance 4%,;(( :(,6(( :*,4(( *4,%(( ,((( ,(((


)et cash flow 0D%6,%(( 0D1;,=(( 0D1,(( 0D%(( D%6,;(( D46,;((9eginning cash ,((( ,((( ,((( ,((( ,((( ,(((

?umulati$e cash balance 0%1,%(( 01*,=(( 01(,(( 4,;(( *1,;(( 1,;((onthly loan or 0repayment %6,%(( 1;,=(( 1,(( %(( 0%6,;(( 046,;((

?umulati$e loan 6:,4(( ;6,*(( 1(1,;(( 1(%,((( :,%(( %;,4((Ending cash balance ,((( ,((( ,((( ,((( ,((( ,(((

86-%:


28/33

%(. 8easonal Croducts ?orporation expects the following monthly sales2

Hanuary.............. D%(,((( ay............. D1,((( 8eptember......... D%(,(((

'ebruary............ 1,((( Hune............. *,((( 7ctober.............. %,(((

arch................ ,((( Huly.............. 1(,((( )o$ember.......... *(,(((pril.................. *,((( ugust......... 14,((( &ecember.......... %%,(((

5otal annual sales D16;,(((

8ales are %( percent for cash in a gi$en month, with the remainder going into accountsrecei$able. ll ;( percent of the credit sales are collected in the month following the sale.8easonal Croducts sells all of its goods for D% each and produces them for D1 each.8easonal Croducts uses le$el production, and a$erage monthly production is equal toannual production di$ided by 1%.

a. Aenerate a monthly production and in$entory schedule in units. 9eginning in$entory inHanuary is ,((( units. 0)ote2 5o do part a, you should wor! in terms of units ofproduction and units of sales.

b. &etermine a cash receipts schedule for Hanuary through &ecember. ssume that dollarsales in the prior &ecember were D1,(((. +or! part busing dollars.

c. &etermine a cash payments schedule for Hanuary through &ecember. 5he productioncosts 0D1 per unit produced are paid for in the month in which they occur. 7ther cashpayments, besides those for production costs, are D6,((( per month.

d. ?onstruct a cash budget for Hanuary through &ecember. 5he beginning cash balance isD1,(((, and that is also the required minimum.

e. &etermine total current assets for each month. 0)ote2 ccounts recei$able equal salesminus %( percent of sales for a gi$en month.

86-%;


29/33

6-#9. Solution:

Seasonal Products Corporation

a. Croduction and in$entory schedule in units

9eginningIn$entory

Croduction1

0le$el F8ales%

EndingIn$entory

0D1 perunit

Hanuary ,((( :,((( 1(,((( %,(((

'ebruary %,((( :,((( :,(( 1,((

arch 1,(( :,((( %,(( 6,(((pril 6,((( :,((( 1,(( 11,((

ay 11,(( :,((( (( 1;,(((

Hune 1;,((( :,((( 1,(( %*,((

Huly %*,(( :,((( ,((( %,((

ugust %,(( :,((( :,((( %,((

8eptember %,(( :,((( 1(,((( %%,((

7ctober %%,(( :,((( 1%,(( 1:,(((

)o$ember 1:,((( :,((( 1,((( =,(((&ecember =,((( :,((( 11,((( ,(((

1D16;,((( salesMD% price ;4,((( units ;4,((( unitsM1% months :,((( units per month%onthly dollar salesMD% number of units

86-%=


30/33

6-#9. 0Continued

b.Cash Receipts Schedule (take dollar values from problem statement)


8ales D%(,((( D1,((( D ,((( D*,((( D1,((( D*,(((%(G ?ash sales 4,((( *,((( 1,((( 6(( %(( 6((

;(G Crior monthBs sales 1%,(((Q 16,((( 1%,((( 4,((( %,4(( ;((

5otal receipts D16,((( D1=,((( D1*,((( D4,6(( D%,6(( D1,4((?based on December sales of 21+5999


8ales D1(,((( D14,((( D%(,((( D%,((( D*(,((( D%%,(((

%(G ?ash sales %,((( %,;(( 4,((( ,((( 6,((( 4,4((

;(G Crior monthBs sales %,4(( ;,((( 11,%(( 16,((( %(,((( %4,(((

5otal receipts D 4,4(( D1(,;(( D1,%(( D%1,((( D%6,((( D%;,4((

86-*(


31/33

6-#9. 0Continued

c.?ash Cayments 8chedule

Constant production


:,((( units K D1 D :,((( D :,((( D :,((( D :,((( D :,((( D :,(((

7ther cash payments 6,((( 6,((( 6,((( 6,((( 6,((( 6,(((5otal payments D1*,((( D1*,((( D1*,((( D1*,((( D1*,((( D1*,(((


:,((( units K D1 D :,((( D :,((( D :,((( D :,((( D :,((( D :,(((

7ther cash payments 6,((( 6,((( 6,((( 6,((( 6,((( 6,(((

5otal cash payments D1*,((( D1*,((( D1*,((( D1*,((( D1*,((( D1*,(((

86-*1


32/33

6-#9. 0Continued

d.Cash Budget


?ash flow D*,((( D 6,((( -(- 0D ;,4(( 0D1(,4(( 0D11,6((9eginning cash 1,((( 4,((( 1(,((( 1(,((( 1,6(( 1,(((

?umulati$e cash balance 4,((( 1(,((( 1(,((( 1,6(( 0;,;(( 01(,6((onthly loan or 0repayment -(- -(- -(- -(- =,;(( 11,6((

?umulati$e loan -(- -(- -(- -(- =,;(( %1,4((

Ending cash balance D4,((( D1(,((( D1(,((( D 1,6(( D 1,((( D 1,(((


?ash flow 0D ;,6(( 0D%,%(( D %,%(( D ;,((( D1*,((( D1,4((

9eginning cash 1,((( 1,((( 1,((( 1,((( 1,((( 1,(((?umulati$e cash balance 0:,6(( 01,%(( *,%(( =,((( 14,((( 16,4((onthly loan or 0repayment ;,6(( %,%(( 0%,%(( 0;,((( 01*,((( 0=,(((

?umulati$e loan *(,((( *%,%(( *(,((( %%,((( =,((( -(-

Ending cash balance D 1,((( D 1,((( D 1,((( D 1,((( D 1,((( D :,4((

86-*%


33/33

6-#9. 0Continued

e.Assets

Cash

ccounts

%ecei&able /n&entory

(otal

Current

Hanuary D 4,((( D16,((( D %,((( D%%,(((

'ebruary 1(,((( 1%,((( 1,(( %*,((

arch 1(,((( 4,((( 6,((( %(,(((

pril 1,6(( %,4(( 11,(( 1,((

ay 1,((( ;(( 1;,((( 1=,;((Hune 1,((( %,4(( %*,(( %6,=((

Huly 1,((( ;,((( %,(( *4,((

ugust 1,((( 11,%(( %,(( *:,:((

8eptember 1,((( 16,((( %%,(( *=,((

7ctober 1,((( %(,((( 1:,((( *;,(((

)o$ember 1,((( %4,((( =,((( *4,(((

&ecember :,4(( 1:,6(( ,((( *(,(((

5he instructor may wish to relate this table to the case budgetto show how the buildup in current assets is financed. lso,the table shows how the assets build up from the least liquidcurrent asset 0in$entory to the next liquid asset 0accountsrecei$ables, and finally by &ecember, the cycle is ready tostart o$er with the flow into the cash balance when the firmeliminates its final loan balance.

chap 2 solution

Documents