Chapter 04 Textbook Problems

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Joliet Junior College *

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Finance

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Feb 20, 2024

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Chapter 4 Problems 8) Central Networks Central Networks had sales of 3,000 units at $50 per unit last year. The marketing manager projects a 20 percent increase in unit-volume sales this year with a 10 percent increase in price. Returned merchandise will represent 6 percent of total sales. What is your net dollar sales projection for this year? 9) All Metal Bearings All Metal Bearings had sales of 10,000 units at $20 per unit last year. The marketing manager projects a 30 percent increase in unit-volume sales this year with a 5 percent price decrease (due to a price reduction by a competitor). Returned merchandise will represent 3 percent of total sales. What is your net dollar sales projection for this year? 10) Ross Pro’s Sports Equipment Sales for Ross Pro’s Sports Equipment are expected to be 4,800 units for October. The company likes to maintain 10 percent of unit sales for each month in ending inventory (that is, end of October). Beginning inventory for October is 300 units. How many units should the firm produce for the coming month? 11) Digitex, Inc. Digitex Inc. had sales of 6,000 units in March. A 50 percent increase is expected in April. The company will maintain 5 percent of expected unit sales for April in ending inventory. Beginning inventory for April was equal to 200 units. How many units should the company produce in April? 12) Hoover Electronics Hoover Electronics has beginning inventory of 22,000 units, will sell 60,000 units for the month, and desires to reduce ending inventory to 30 percent of beginning inventory. How many units should Hoover produce?

23) Ed’s Waterbeds has made the following sales projections for the next six months. All sales are credit sales. March $12,000 June $14,000 April 16,000 July 17,000 May 10,000 August 18,000 Sales in January and February were $13,500 and $13,000 respectively. Experience has shown that 10 percent of total sales are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale. a. Prepare a monthly cash receipts schedule for the firm for March through August. Ed’s Waterbeds Cash Receipts Schedule January February March April May June July August Sales $13,500 $13,000 $12,000 $16,000 $10,000 $14,000 $17,000 $18,000 Collections(30% of current sales) Collections(40% of prior month's sales) Collections(20% of sales 2 months earlier) Total cash receipts Of the sales expected to be made during the six months from March to August, how much will still be uncollected at the end of August? How much of this is expected to be collected later?

24) The Prince Albert Corporation has forecast the following sales for the first seven months of the year. January $ 10,000 May $ 10,000 February 12,000 June 16,000 March 14,000 July 18,000 April 20,000 Monthly material purchases are set equal to 30 percent of forecasted sales for the next month. Of the total material costs, 40 percent are paid in the month of purchase and 60 percent are paid in the following month. Labour costs will run $4,000 per month, and fixed overhead is $2,000 per month. Interest payments on the debt will be $3,000 for both March and June. Finally, the Prince Albert salespeople will receive a 1.5 percent commission on total sales for the first six months of the year, to be paid on June 30. Using the table on the following page, prepare a monthly summary of cash payments for the six months from January through June. (Note: Compute prior December purchases to help get total material payments for January.)

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Prince Albert Corporation Cash Payment Schedule Dec. Jan. Feb. March April May June July Sales (only used to determine purchases) Purchases (30% of next month's sales) Payment (40% of current purchases) Payment (60% of prior month's purchases) Total payment for materials Labour costs Fixed overhead Interest payments Sales commission (1.5% of $82,000) Total payments

29) Jim Daniels Health Products Jim Daniels Health Products has eight stores. The firm wants to expand by two more stores and needs a bank loan to do this. Mr. Hewitt, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. Following are actual and forecasted sales figures: Actual Forecast Additional Information Novembe r $ 200,000 January $ 280,000 April forecast $330,000 Decembe r 220,000 February 320,000 March 340,000 Of the firm’s sales, 40 percent are for cash and the remaining 60 percent are on credit. Of credit sales, 30 percent are paid in the month after sale and 70 percent are paid in the second month after the sale. Materials cost 30 percent of sales and are purchased and received each month in an amount sufficient to cover the current month’s expected sales. Materials are paid for in the month they are received. Labour expense is 40 percent of sales and is paid in the month of sales. Selling and administrative expense is 5 percent of sales and is also paid in the month of sales. Overhead is $28,000 in cash per month; amortization expense is $10,000 per month. Taxes of $8,000 will be paid in January and dividends of $2,000 will be paid in March. Cash at the beginning of January is $80,000 and the minimum desired cash balance is $75,000 . Using the tables on the following pages, prepare the cash receipts schedule, the cash payments schedule, and the cash budget.

Jim Daniels Health Products Cash Receipts Schedule November December January February March April Sales $200,000 $220,000 $280,000 $320,000 $340,000 $330,000 Credit sales (60%) Cash sales (40%) Collections (month after credit sales) 30% Collections (two months after credit sales) 70% Total cash receipts

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Jim Daniels Health Products (continued) Cash Payments Schedule January February March Payments for purchases (30% of next month's sales paid in month after purchases - equivalent to 30% of current sales) Labour expense (40% of sales) Selling and admin. expense (5% of sales) Overhead Taxes Dividends Total cash payments* * The $10,000 of amortization is excluded because it is not a cash expense.

Jim Daniels Health Products (Continued) Cash Budget January February March Total cash receipts Total cash payments Net cash flow Beginning cash balance Cumulative cash balance Monthly loan or (repayment) Cumulative loan balance Ending cash balance

31) Carter Paint Company Carter Paint Company has plants in four provinces. Sales last year were $100 million, and the balance sheet at year ‐ end is similar in percent of sales to that of previous years (and this will continue in the future). All assets and current liabilities will vary directly with sales. Assume the firm is already using capital assets at full capacity. Balance Sheet (in $ millions) Assets Liabilities and Shareholders' Equity Cash $ 5 Accounts payable $15 Accounts receivable 15 Accrued wages 6 Inventory 30 Accrued taxes 4 Current assets 50 Current liabilities 25 Capital assets 40 Long-term debt 30 Common stock 15 Retained earnings 20 Total assets $90 Total liabilities and shareholders' equity $90 The firm has an after-tax profit margin of 5 percent and a dividend payout ratio of 30 percent. a. If sales grow by 10 percent next year, determine how many dollars of new funds are needed to finance the expansion. b. Prepare a pro forma balance sheet with any financing adjustment made to long ‐ term debt.

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32) Longbranch Western Wear The Longbranch Western Wear Company has the following financial statements, which are representative of the company’s historical average. Income Statement Sales $ 200,00 0 Expenses 158,00 0 Earnings before interest and taxes $ 42,000 Interest 2,000 Earnings before taxes $ 40,000 Taxes 20,000 Earnings after taxes $ 20,000 Dividends $ 10,000 Balance Sheet Assets Liabilities and Shareholders' Equity Cash $5,000 Accounts payable $5,000 Accounts receivable 10,000 Accrued wages 1,000 Inventory 15,000 Accrued taxes 2,000 Current assets $30,000 Current liabilities $8,000 Capital assets 70,000 Notes payable 7,000 Long-term debt 15,000 Common stock 20,000 Retained earnings 50,000 Total assets $100,000 Total liabilities and equity $100,000 Longbranch is expecting a 20 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of capital assets; instead, it will be done through more efficient asset utilization in the existing stores. Of liabilities, only current liabilities vary directly with sales. a. Using a percent-of-sales method, determine whether Longbranch Western Wear has external financing needs.

b. Prepare a pro forma balance sheet with any financing adjustment made to notes payable and excess, if any, shall reduce long term debt.

34) Harvard Prep Shops Harvard Prep Shops, a national clothing chain, had sales of $300 million last year. The business has a steady net profit margin of 15 percent and a dividend payout ratio of 30 percent. The balance sheet for the end of last year is shown below: Balance Sheet December 31, 20XX ($ millions) Assets Liabilities and Shareholders' Equity Cash $7 Accounts payable $55 Account receivable 28 Accrued expenses 15 Inventory 60 Other payables 20 Common stock 30 Plant and equipment 115 Retained earnings 90 Total assets $210 Total liabilities and equity $210 Harvard’s anticipates a large increase in the demand for tweed sport coats and deck shoes. A sales increase of 25 percent is forecast. All balance sheet items are expected to maintain the same percent-of-sales relationships as last year, except for common stock and retained earnings. No change in the number of common shares outstanding is scheduled and retained earnings will change as dictated by the profits and dividend policy of the firm. a. Will external financing be required for the Prep Shop during the coming year? b. What would the need for external financing be if the net profit margin went up to 20 percent and the dividend payout ratio was increased to 65 percent?

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