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- CASH BUDGETING Helen Bowers, owner of Helens Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2019 and 2020: Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials: General and administrative salaries are approximately 27,000 a month. Lease payments under long-term leases are 9,000 a month. Depreciation charges are 36,000 a month. Miscellaneous expenses are 2,700 a month. Income tax payments of 63,000 are due in September and December. A progress payment of 180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be 132,000, and a minimum cash balance of 90,000 should be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2019. b. Prepare monthly estimates of the required financing or excess fundsthat is, the amount of money Bowers will need to borrow or will have available to invest. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects. d. Bowers sales are seasonal, and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the companys current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firms ability to obtain bank credit? Explain.Review the completed master budget and answer the following questions: Is Ranger Industries expecting to earn a profit during the next quarter? If so, how much? Does the company need to borrow cash during the quarter? Can it make any repayments? Explain. (Carefully review rows 74 through 80.)OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its WACC is 125%. The company is considering the following seven investment projects: Project Size IRR A 750,000 14.0% B 1,250,000 13.5 C 1,250,000 13.2 D 1,250,000 13.0 E 750,000 12.7 F 750,000 12.3 G 750,000 12.2 a. Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted, and what is the firm's optimal capital budget? b. Now assume that Projects C and D are mutually exclusive. Project D has an NPV of 400,000, whereas Project C has an NPV of 350,000. Which set of projects should be accepted, and what is the firm's optimal capital budget? c. Ignore Part b and assume that each of the projects is independent but that management decides to incorporate project risk differentials. Management judges Projects B, C, D, and E to have average risk; Project A to have high risk; and Projects F and G to have low risk. The company adds 2% to the WACC of those projects that are significantly more risky than average, and it subtracts 2% from the WACC of those projects that are substantially less risky than average. Which set of projects should be accepted, and what is the firm's optimal capital budget?
- Review of Basic Capital Budgeting Procedures Dr. Whitley Avard, a plastic surgeon, had just returned from a conference in which she learned of a new surgical procedure for removing wrinkles around eyes, reducing the time to perform the normal procedure by 50%. Given her patient-load pressures. Dr. Avard is excited to try out the new technique. By decreasing the time spent on eye treatments or procedures, she can increase her total revenues by performing more services within a work period. In order to implement the new procedure, special equipment costing 74,000 is needed. The equipment has an expected life of 4 years, with a salvage value of 6,000. Dr. Avard estimates that her cash revenues will increase by the following amounts: She also expects additional cash expenses amounting to 3,000 per year. The cost of capital is 12%. Assume that there are no income taxes. Required: 1. Compute the payback period for the new equipment. 2. Compute the ARR. Round the percentage to two decimal places. 3. CONCEPTUAL CONNECTION Compute the NPV and IRR for the project. Use 14% as your first guess for IRR. Should Dr. Avard purchase the new equipment? Should she be concerned about payback or the ARR in making this decision? 4. CONCEPTUAL CONNECTION Before finalizing her decision. Dr. Avard decided to call two plastic surgeons who have been using the new procedure for the past 6 months. The conversations revealed a somewhat less glowing report than she received at the conference. The new procedure reduced the time required by about 25% rather than the advertised 50%. Dr. Avard estimated that the net operating cash flows of the procedure would be cut by one-third because of the extra time and cost involved (salvage value would be unaffected). Using this information, recompute the NPV of the project. What would you now recommend?OPTIMAL CAPTTAL BUDGET Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained earnings at 2,500,000 of capital due to the number of highly profitable projects available to the firm and its limited earnings. The company is considering the following seven investment projects: Project Size IRR A 650,000 14.0% B 1,050,000 13.5 C 1,000,000 11.2 D 1,200,000 11.0 E 500,000 10.7 F 650,000 10.3 G 700,000 10.2 Assume that each of these projects is independent and that each is just as risky as the firm's existing assets. Which set of projects should be accepted, and what is the firm's optimal capital budget?Carmichael Corporation is in the process of preparing next years budget. The pro forma income statement for the current year is as follows: Required: 1. What is the break-even sales revenue (rounded to the nearest dollar) for Carmichael Corporation for the current year? 2. For the coming year, the management of Carmichael Corporation anticipates an 8 percent increase in variable costs and a 60,000 increase in fixed expenses. What is the break-even point in dollars for next year? (CMA adapted)
- Coral Seas Jewelry Company makes and sells costume jewelry. For the coming year, Coral Seas expects sales of 15.9 million and cost of goods sold of 8.75 million. Advertising is a key part of Coral Seas business strategy, and total marketing expense for the year is budgeted at 2.8 million. Total administrative expenses are expected to be 675,000. Coral Seas has no interest expense. Income taxes are paid at the rate of 40 percent of operating income. Required: 1. Construct a budgeted income statement for Coral Seas Jewelry Company for the coming year. 2. What if Coral Seas had interest payments of 500,000 during the year? What effect would that have on operating income? On income before taxes? On net income?Capital Budgeting: Natural Organics Products, a company with profitable ongoing operations, is considering a major six-year project on which the company has already incurred $1,200,000 in research and development costs. The vice-president in charge of finance has provided you with the following data and worksheet and has asked you to determine, using an NPV analysis, if the project should be undertaken. She has also hinted that your future with the company hinges on a successful analysis of the project. Data Sheet: Company’s tax rate = 40% Company’s opportunity cost of capital = 15% Net working capital requirements of the project if it is accepted: Year 0 $160,000 Year 1 $240,000 Year 2 $240,000 Year 3 $240,000 Year 4 $180,000 Year 5 $50,000 Year 6 $0 New equipment purchases required for the project total $14,000,000. At the end of the project, it is expected that the equipment can be sold to a competitor for $2,000,000. This equipment would be placed in the company’s in the…Chapter : Budgeting South Hampton University is preparing its budget for the upcoming academic year. This is a specialised private university that charges fees for all degree courses. Currently, 30,000 students are enrolled on campus. However, the university is forecasting a 5 per cent growth in student numbers in the coming year, despite an increase in fees to $3,000 per subject. The following additional information has been gathered from an examination of university records and conversations with university managers: South Hampton is planning to award scholarships to 200 students, which will cover their fees. The average class has 80 students, and the typical student takes 4 subjects per semester. South Hampton operates 2 semesters per year. The average academic staff salary is $120,000 per annum including on-costs. South Hampton’s academic staff are evaluated on the basis of teaching, research, administration and professional/community service. Each of the academic staff teaches…
- Working capital and capital budgeting. Farbuck's Tea Shops is thinking about opening another tea shop. The incremental cash flow (not including the working capital investment) for the first five years is as follows: Initial capital cost=$3,500,000 Operating cash flow for each year=$1,000,000 Recovery of capital assets after five years=$260,000 The hurdle rate for this project is 12%. If the initial cost of working capital is $490,000 for items such as teapots, teacups, saucers, and napkins, should Farbuck's open this new shop if it will be in business for only five years? What is the most it can invest in working capital and still have a positive net present value? Should Farbuck's open this new shop if it will be in business for only five years? (Select the best response.) A.Yes. Farbuck's should open the new shop because the project's NPV is $40,346. B.No. Farbuck's should not open the new shop because the project's NPV is…CAPITAL BUDGETING DECISION CRITERIA(a) Big Pineapple, a maker of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of RM40,000 and will generate free cash inflows of RM7,000 in years 1 through 5, RM8,000 in year 6, RM10,000 in year 7, RM15,000 in year 8, RM10,000 in year 9 and RM4,000. If the required rate of return is 10 percent;1. Calculate the Payback Period?2. Calculate the Net Present Value (NPV)?(b)Honeydew Sdn. Bhd has been presented with an opportunity to invest in a project. Investment Required is RM60,000,000, Annual Gross Income is RM14,000,000, Annual Operating Costs is RM5,500,000 and nil for Salvage Value after 10 years. The project is expected to operate as shown for ten years. If your management expects to make 10% on its investment before taxes. Calculate the Internal Rate of Return (IRR) for this project and would you recommend Honeydew Sdn. Bhd this project? Explain.(c)Many acts such as…Capital Budgeting 1. Knight Company has found that 30% of its sales are collected in the month of the sale and the remainder of the sales are collected in the next month. If sales are expected to be $100,000 in April, $120,000 in May, and $80,000 in June, what is the estimated amount of cash receipts for May?A. $114,000B. $106,000C. $92,000D. $108,000 2. In recent years, Princess Company has collected 20% of its sales in the month of the sale and the other 80% in the following month. During the first three months of 2002, Princess is anticipating sales of $350,000; $403,000; and $389,000, respectively. What is the amount of cash receipts budgeted for March?A. $301,200B. $360,600C. $400,200D. $391,800