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Foundations of Financial Manag

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Financial Forecasting
Problem 4-24 Problem 4-26

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CHAPTER 4
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Problem 4-28

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Now 600000 1. Looking at Mr. Miyagi's starting pay
Proj 1200000
Net assets (assets - liabilities) 50%
Percent return 8%
Start pay 120000

Cash $ 120,000
Asset Buildup $ 300,000
Profit $ 96,000

Total $ (84,000)
Proj Sales 650000
Starting Cash 250000
Return on sales 12%

Cash $ 250,000
Sales -
Return on saes $ 78,000

Total $ 328,000
Initial Sales 1550000
Sales (y2) 1750000
Net assets 50%
Return on sales 8%
Dividends 45% or 25%
a.
Asset Buildup $ 100,000
Net assets $ 875,000
Profits $ 140,000
Dividends $ 63,000

Change in cash $ (23,000)

b.
Dividends $ 35,000
Change in cash $ 5,000
Outcome Probability Units Price Total Value Expected Value
A 0.70 225 $20 $4,500 $3,150
B 0.10 370 $35 $12,950 $1,295
C 0.20 510 $45 $22,950 $4,590
Total Expected Value $9,035
Projected Sales Desired Ending Inventory Beginning Inventory Total Units to Produce
4800 480 300 4980
a. Units Value Total
Febuary 900 $16 $14,400
January 600 $12 $7,200
Total Cost through LIFO $21,600

b. Units Value Total

January 775 $12 $9,300
Fabuary 725 $16 $11,600
Total Cost through FIFO $20,900
 Units Value
Sales 47350 $ 2,111,810
New Inventory 43000 36.6 $ 1,573,800
Old Inventory 4350 30.1 $ 130,935
Cost of Goods Sold $ 1,704,735
Gross Profit $ 407,075
 January February March April May June
Sales $ 41,000 $ 39,000 $ 41,000 $ 50,000 $ 32,000 $ 47,000
40% of Sales 16400 20000 12800 18800
30% of Prior 11700 12300 15000 9600
20% of 2 Months Prior 8200 7800 8200 10000
Total Cash Recipts $ 36,300 $ 40,100 $ 36,000 $ 38,400
July August
$ 58,000 $ 62,000
23200 24800
14100 17400
6400 9400
$ 43,700 $ 51,600
 December January February March April
Purchases 25000 36250 36250 36250 36250
Materials 25000 36250 36250 36250
Labor 15000 18000 15000 20000
Fixed Overhead 11000 11000 11000 11000
Total Cash Payments $ 51,000 $ 65,250 $ 62,250 $ 67,250
 Foundations of Financial Management
Block, Hirt, and Danielsen

Problem 4-24
Objective: Cash budget

Student Name:
Course Name:
Student ID:
Course Number:

Graham Potato Company has projected sales of $12,000 in September, $15,000 in October, $22,000 in November,
and $18,000 in December. Of the company’s sales, 30 percent are paid for by cash and 70 percent are sold
on credit. Experience shows that 40 percent of the accounts receivable are paid in the month after the sale,
while the remaining 60 percent are paid two months after. Determine collections for November and December.

Also assume the company's cash payments for November and December are $18,500 and $11,000,
respectively.The beginning cash balance in November is $5,000, which is the desired minimum balance.

Prepare a cash budget with borrowing needed or repayments for November and December. (You will need
to prepare a cash receipts schedule first).

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 4-24
 Solution
Problem 4-24
Instructions
Enter cell references, data, and formulas to complete the cash receipts schedule and the cash budget.

Graham Potato Company

Cash Receipts Schedule

September October November December

Sales $12,000 $15,000 $22,000 $18,000
Credit sales (70%) $8,400 $10,500 $15,400 $12,600
Cash sales (30%) 3,600 4,500 6,600 5,400
Collections in months
Collections 2 month after
aftersale
sale(40%) 3,360 3,360 4,200 6,160
(60%) 5,040 6,300
Total cash receipts 7,860 15,840 17,860

Graham Potato Company

Cash Budget

November December
Cash receipts 15,840 17,860
Cash payments 18,500 11,000
Net cash flow -2,660 6,860
Beginning cash balance 5,000 -1,440
Cumulative cash balance 2,340 5,420
Monthly loan or (repayment) 3,780
Cumulative loan balance 3,780
Ending cash balance -1,440 5,420

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 4-24
 Foundations of Financial Management
Block, Hirt, and Danielsen

Problem 4-26
Objective: Complete cash budget

Student Name:
Course Name:
Student ID:
Course Number:

Archer Electronics Company’s actual sales and purchases for April and May are shown here along with forecasted
sales and purchases for June through September.

Sales Purchases
April (actual) $370,000 $155,000
May (actual) 350,000 145,000
June (forecast) 325,000 145,000
July (forecast) 325,000 205,000
August (forecast) 340,000 225,000
September (forecast) 380,000 220,000

The company makes 20 percent of its sales for cash and 80 percent on credit. Of the credit sales, 50
percent are collected in the month after the sale and 50 percent are collected two months later.
Archer pays for 20 percent of its purchases in the month after purchase and 80 percent two months after.

Labor expense equals 15 percent of the current month’s sales. Overhead expense equals $12,500 per
month. Interest payments of $32,500 are due in June and September. A cash dividend of $52,500 is
scheduled to be paid in June. Tax payments of $25,500 are due in June and September. There is a
scheduled capital outlay of $350,000 in September.

Archer Electronics’s ending cash balance in May is $22,500. The minimum desired cash balance is $10,500.
Prepare a schedule of monthly cash receipts, monthly cash payments, and a complete monthly cash budget
with borrowing and repayments for June through September. The maximum desired cash balance is $50,500.
Excess cash (above $50,500) is used to buy marketable securities. Marketable securities are sold before
borrowing funds in case of a cash shortfall (less than $10,500).

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 4-26
 Solution
Problem 4-26
Instructions
Archer Electronics
Cash Receipts Schedule

April May June July Aug Sept

Sales $370,000 $350,000 $325,000 $325,000 $340,000 $380,000
Credit sales (80%) 296,000 280,000 260,000 260,000 272,000 304,000
Cash sales (20%) 74,000 70,000 65,000 65,000 68,000 76,000
Collections (month
after sale) 50% 148,000 140,000 130,000 130,000 136,000
Collections (second
month after sale)
50% 148,000 140,000 130,000 130,000

Total cash receipts

$353,000 $335,000 $328,000 $342,000

Archer Electronics
Cash Payments Schedule

April May June July Aug Sept

Purchases $155,000 $145,000 $145,000 $205,000 $225,000 $220,000
Payments (month
after purchase—
20%) 31,000 29,000 29,000 41,000 45,000
Payments (second
month after
purchase—80%) 124,000 116,000 116,000 164,000
Labor expense
(15% of sales) 48,750 48,750 51,000 57,000
Overhead 12,500 12,500 12,500 12,500
Interest payments 32,500 32,500
Cash dividend 52,500
Taxes 25,500 25,500
Capital outlay 350,000
Total cash
payments $272,250 $206,250 $220,500 $739,000

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 4-26
 Archer Electronics
Cash Budget

June July August September

Cash receipts $353,000 $335,000 $328,000 $342,000
Cash payments 272,250 206,250 220,500 739,000
Net cash flow 80,750 128,750 107,500 -397,000
Beginning cash balance 225,000 50,500 50,500 50,500
Cumulative cash balance 305,750 179,250 158,000 -346,500
Monthly borrowing or (repayment) 68,000
Cumulative loan balance 68,000
Marketable securities purchased 52,750 128,750 107,500
(sold) 289,000
Cumulative marketable securities 52,750 181,500 289,000
Ending cash balance 50,500 50,500 50,500 10,500

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 4-26
Foundations of Financial Management
Block, Hirt, and Danielsen

Problem 4-28
Objective: Percent-of-sales method

Student Name:
Course Name:
Student ID:
Course Number:

The Manning Company has financial statements, which are representative of the company’s historical average.

The firm is expecting a 35 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 fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only
current liabilities vary directly with sales.
Using the percent-of-sales method, determine whether the company has external financing needs or a surplus
of funds. (Hint: A profit margin and payout ratio must be found from the income statement.)

INCOME STATEMENT
Sales $250,000
Expenses 192,000
Earnings before interest and taxes $58,000
Interest 7,500
Earnings before taxes $50,500
Taxes 15,500
Earnings after taxes $35,000
Dividends $7,000

BALANCE SHEET

Assets Liabilities and Stockholders' Equity

Cash $8,500 Accounts payable $26,400

Accounts receivable 63,000 Accrued wages 2,350
Inventory 91,000 Accrued taxes 3,750
Current assets $162,500 Current liabilities $32,500
Fixed assets 85,000 Notes payable 7,500
Long-term debt 17,500
Common stock 125,000
Retained earnings 65,000
Total assets $247,500 Total liabilities and stockholders' equity $247,500

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 4-28
 Solution
Problem 4-28
Instructions
Using cell references and formulas, calculate the financial items below to ultimately determine the
external funds that will be needed.

Profit margin 14%

Payout ratio 20%

Change in sales ($) $87,500

Change in spontaneous assets

Change in spontaneous liabilities

Change in retained earnings $99,568

External funds needed

Copyright © 2011 McGraw-Hill/ Irwin Spreadsheet Template by Block, Hirt and Danielsen Problem: 4-28