Project #18521 - Financial Management

This exam is the first part of a two part final exam. Please sign and date each sheet, and staple them. You may add your solutions onto separate sheets, and attach them. Wherever possible utilize a spreadsheet to show all of your work. Remember to number the solutions accordingly. You may use your text book, Gallagher. This exam is due in class on Thursday, 12/5/13. To assure I have your exams on time, as always, send a soft copy by email.

Good luck!

 

 

 

1.            1-a) What are “surplus economic units”? Give two examples of entities in the financial system that typically would be classified as surplus economic units.

 

 

 

 

1-b) What are “deficit economic units”? Give two examples of entities in the financial system that

   typically would be classified as deficit economic units.

 

 

 

 

2.           2. Assume that Parsons National Bank has $60 million in transaction accounts, $20 million in nonpersonal time deposits, and $10 million in Eurocurrency liabilities. Given the reserve requirements shown in Table 3-1 (see Gallagher), how much must Parsons keep on hand in reserve funds? 

 

 

 

 

     3.   Develop a pro forma income statement and balance sheet for the New Future Corporation. The company’s 2012 financial statements are shown below. Base your forecast on the financial statements and the following assumptions:

 

·       Sales growth is predicted to be 20 % in 2013.

·       Cost of goods sold, selling and administrative expense, all current assets, accounts payable, and accrued expenses will remain the same percentage of sales as in 2012.

·       Depreciation expense, interest expense, gross plant and equipment, notes payable, long-term debt, and equity accounts other than retained earnings in 2013 will be the same as in 2012.

·       The company’s tax rate in 2013 will be 40%.

·       The same dollar amount of dividends will be paid to common stockholders in 2013 as in 2012.

·       Bad debt allowances in 2013 will be the same percentage of accounts receivable as it was in 2012.

 

 

NEW FUTURE CORPORATION

Historical and Projected Income Statements

 

 

 

Historical

 

2012

 

 

Sales

$10,000,000

Cost of goods Sold

$4,000,000

Gross Profit

$6,000,000

Selling & Admin. Expenses

$800,000

Depreciation Expense

$2,000,000

Operating Income (EBIT)

$3,200,000

Interest Expenses

$1,350,000

Earnings Before Tax (EBT)

$1,850,000

Income Tax (40%)

$740,000

Net Income (NI)

$1,110,000

 

 

Common Stock Dividends paid

$400,000

Addition to Retained earnings

$710,000

Earnings per Share (1,000,000 shares)

$1.11

 

 

BRIGHT FUTURE CORPORATION

 

Historical and Projected Balance Sheets

 

 

 

 

Historical

 

Dec 31, 2012

ASSETS

 

Current Assets:

 

  Cash

$9,000,000

  Marketable Securities

$8,000,000

  Accounts Receivable (Net)

$1,000,000

  Inventory

$20,000,000

  Prepaid Expenses

$1,000,000

Total Current Assets

$39,000,000

Plant and Equipment (gross)

$20,000,000

  Less:  Accumulated Depreciation

$9,000,000

Plant and equipment (net)

$11,000,000

TOTAL ASSETS

$50,000,000

 

 

LIABILITIES AND EQUITY

 

Current Liabilities:

 

  Accounts payable

$12,000,000

  Notes Payable

$5,000,000

  Accrued Expenses

$3,000,000

Total Current Liabilities

$20,000,000

L-T Debt (Bonds Payable, 5%, due 2015)

$20,000,000

Total Liabilities

$40,000,000

Common Stock (1,000,000 shares, $1 par)

$1,000,000

Capital in Excess of Par

$4,000,000

Retained Earnings

$5,000,000

Total Equity

$10,000,000

TOTAL LIABILITIES AND EQUITY

$50,000,000

 

 

 

     5.   A firm has an existing portfolio of projects with an expected return of 11% a year. The standard deviation of these returns is 4 %. The existing portfolio’s value is $820,000. As financial manager, you are considering the addition of a new project, PROJ1. PROJ1’s expected return is 13% with a standard deviation of 5%. The initial cash outlay for PROJ1 is expected to be $194,000.

 

a.

Calculate the coefficient of variation for the existing portfolio.

b.

Calculate the coefficient of variation for PROJ1.

c.

If PROJ1 is added to the existing portfolio, calculate the weight (proportion) of the existing portfolio in the combined portfolio.

d.

Calculate the weight (proportion) of PROJ1 in the combined portfolio.

e.

Assume the correlation coefficient of the cash flows of the existing portfolio and PROJ1 is zero. Calculate the standard deviation of the combined portfolio. Is the standard deviation of the combined portfolio higher or lower than the standard deviation of the existing portfolio?

f. Calculate the coefficient of variation of the combined portfolio.

g. If PROJ1 is added to the existing portfolio, will the firm’s risk increase or decrease?

 

 

 

     6.   Your firm has a beta of 1.5 and you are considering an investment project with a beta of 0.8. Answering the following questions, assuming that short-term Treasury bills are currently yielding 5 percent and the expected return on the market is 15%.

a.

What is the appropriate required rate of return for your company per the capital asset pricing model?

b.

What is the appropriate required rate of return for the investment project per the capital asset pricing model?

c.

If your firm invests 20% of its assets in the new investment project, what will be the beta of your firm after the project is adopted? (Hint: Compute the weighted average beta of the firm with the new asset, using Equation 7-4 (see Gallagher).)

 

 

 

 

 

 

7.        Sunstone, Inc., has entrusted financial analyst Flower Belle Lee with the evaluation of a project that involves buying a new asset at a cost of $90,000. The asset falls under the MACRS three-year class and will generate the following revenue stream:

 

End of Year                1                      2                      3                      4

Revenues ($)                50,000             30,000             20,000             20,000

 

The asset has a resale value of $10,000 at the end of the fourth year. Sunstone’s discount rate is 11%. The company has an income tax rate of 30%. Should Flower recommend purchase of the asset? Explain why.

 

 

8.        Moonstone., a competitor of Sunstone, Inc., in the above problem, is considering purchasing similar equipment with the same revenue, initial investment, MACRS class, and resale value. Moonstone’s discount rate is 10% and its income tax rate is 40%. However, Moonstone is considering the new asset to replace an existing asset with a book value of $20,000 and a resale value of $10,000. What would be the NPV of the replacement project?

 

 

 

9.        Considering the following balance sheet for Lulu Belle’s Killer Guard Dogs, Inc.:

 

            Assets                                                             Liabilities and Equity

 

Cash                             $ 50                                         Accounts Payable         $80

Marketable Securities        0                                         Short-Term Debt           90

Accounts Receivable       40                                         Long-Term Debt          210

Inventories                     70                                         Common Equity           310

Net Fixed Assets          530                                                                             $690

                                    $690

 

 

a.

How much working capital does Lulu Belle have?

b.

How much net working capital does Lulu Belle have?

c.

What working capital financing policy (aggressive, moderate, or conservative) is Lulu Belle following?

d.

Explain what actions Lulu Belle could take to increase the company’s liquidity.

 

 

 

   10.   The following is an estimate of sales revenues for 2013 for Kcir Inc.

 

                                                                                               Sales

                       January                                                                        $ 17,956

                       February                                                              16,523

                       March                                                                 18,366

                       April                                                                   19,500

                       May                                                                    22,890

                       June                                                                    22,980

                       July                                                                     23,157

                       August                                                                 23,000

                       September                                                           21,650

                       October                                                                           19,250

                       November                                                           18,920

                       December                                                            19,069

 

           All purchases are made on credit. History shows that 45% of customers will pay off their accounts in the month the purchase is made, 40 % of customers will pay off their accounts in the month following the purchase month, and 15 % will pay off their accounts in the second month following the purchase month. Find the cash collection for:

a.     March

b.     June

c.     September

 

 

 

 

   11.   Fitzgerald Company has credit terms of 2/15, n60. The historical payment patterns of its customers are as follows:

·       40 % of customers pay in 15 days.

·       57 % of customers pay in 60 days.

·       3 % of customers pay in 100 days.

 

Annual sales are $730,000. Assume there are 365 days in a year.

a.

Calculate the average collection period (ACP).

b.

What is the accounts receivable (AR) assuming all goods are sold on credit?

 

 

 

   12.   Jamison Electronics is forecasting next year’s optimal order size. In 2012, annual sales are 200 units, with a carrying cost of $150 per unit and ordering costs of $50. However, its 2013 forecast is that annual unit sales will increase by 25 % and that both ordering and carrying costs will increase by 10 %. What will their optimal order size be for 2013, if these numbers are correct?

 

 

 

 

 

 

 

 

 

EXTRA CREDIT PROBLEM:

 

13. Mr. Homer Smith is the vice president of sales for Sunrise Corporation, which buys and sells mobile homes. He is sure that increasing the number of homes on display will cause sales to increase. He thinks that an increase in inventory effective January 1, 2013, from the present level of 60 units to 100 units will boost sales from 350 units per year to 450 units per year. Assume ordering cost to be $200 per order, carrying cost to be $600 per unit per year, unit sales price to be $10,000, unit purchase price to be $8,000, and applicable income tax rate to be 40 %. Also assume that any increase in the current assets will be financed by short-term notes at an interest rate of 7 %, long-term interest rate is 10 %, cost of capital for Sunrise is 11 %, cost of goods sold is 80 % of sales, and other operating expenses is $100,000 under the old policy. The pro forma balance sheet items of the company under the policy would be as follows:

 

           Cash and Securities       $          55,000             Accounts Payable         $          100,000

           Accounts Receivable               105,000                        Notes Payable                            95,000

           Plant and Equipment               100,000                        Long-Term Debt                        65,000

           Common Stock                                    60,000             Capital in Excess of Par                       220,000

 

           Also assume that the cost of goods sold and other operating expenses in the income statement and all current asset and current liability items vary directly with sales.

 

a.     Calculate the EOQ, number of orders issued per year, and inventory cost.

b.     Develop pro forma income statements and balance sheets under the old and the new policies.

c.     Calculate the incremental cash flows for 2013 and the subsequent years.

d.     Advise Mr. Smith if he should adopt the new policy.

 

 

 

 

 

 

Subject Mathematics
Due By (Pacific Time) 12/04/2013 12:00 am
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