P4\u00e2\u0080\u00935 Classifying inflows and outflows of cash Classify each of the
\nfollowing items as an
\ninflow (I) or an outflow (O) of cash, or as neither (N).
\nLG 2
\nLG 2
\nItem Change ($) Item Change ($)
\nCash +100 Accounts receivable ?700
\nAccounts payable ?1,000 Net profits +600
\nNotes payable +500 Depreciation +100
\nLong-term debt ?2,000 Repurchase of stock +600
\nInventory +200 Cash dividends +800
\nFixed assets +400 Sale of stock +1,000<\/p>\n
P4\u00e2\u0080\u00936 Finding operating and free cash flows Consider the following
\nbalance sheets and
\nselected data from the income statement of Keith Corporation.
\nDecember 31
\nAssets 2015 2014
\nCash $ 1,500 $ 1,000
\nMarketable securities 1,800 1,200
\nAccounts receivable 2,000 1,800
\nInventories 2,900 2,800
\nTotal current assets $ 8,200 $ 6,800
\nGross fixed assets $29,500 $28,100
\nLess: Accumulated depreciation 14,700 13,100
\nNet fixed assets $14,800 $15,000
\nTotal assets $23,000 $21,800
\nLiabilities and stockholders\u00e2\u0080\u0099 equity
\nAccounts payable $ 1,600 $ 1,500
\nNotes payable 2,800 2,200
\nAccruals 200 300
\nTotal current liabilities $ 4,600 $ 4,000
\nLong-term debt 5,000 5,000
\nTotal liabilities $ 9,600 $ 9,000
\nCommon stock $10,000 $10,000
\nRetained earnings 3,400 2,800
\nTotal stockholders\u00e2\u0080\u0099 equity $13,400 $12,800
\nTotal liabilities and stockholders\u00e2\u0080\u0099 equity $23,000 $21,800
\nKeith Corporation Balance Sheets
\nISBN 1Depreciation
\nexpense $1,600
\nEarnings
\nbefore interest and taxes (EBIT) 2,700
\nInterest
\nexpense 367
\nNet
\nprofits after taxes 1,400
\nTax
\nrate 40%<\/p>\n
a.
\nCalculate the firm\u00e2\u0080\u0099s net operating profit after taxes (NOPAT) for the year ended
\nDecember
\n31, 2015, using Equation 4.1.
\nb.
\nCalculate the firm\u00e2\u0080\u0099s operating cash flow (OCF) for the year ended December 31,
\n2015,
\nusing Equation 4.3.
\nc.
\nCalculate the firm\u00e2\u0080\u0099s free cash flow (FCF) for the year ended December 31, 2015,
\nusing
\nEquation 4.4.
\nd.
\nInterpret, compare, and contrast your cash flow estimates in parts b and c.<\/p>\n
P4\u00e2\u0080\u00939
\nCash budget: Basic Grenoble Enterprises had sales of $50,000 in March and
\n$60,000
\nin April. Forecast sales for May, June, and July are $70,000, $80,000, and
\n$100,000,
\nrespectively. The firm has a cash balance of $5,000 on May 1 and wishes
\nto
\nmaintain a minimum cash balance of $5,000. Given the following data, prepare
\nand
\ninterpret a cash budget for the months of May, June, and July.
\n(1)
\nThe firm makes 20% of sales for cash, 60% are collected in the next month,
\nand
\nthe remaining 20% are collected in the second month following sale.
\nLG
\n4
\nLG
\n4
\nDepreciation
\nexpense $1,600
\nEarnings
\nbefore interest and taxes (EBIT) 2,700
\nInterest
\nexpense 367
\nNet
\nprofits after taxes 1,400
\nTax
\nrate 40%
\nKeith
\nCorporation Income Statement Data (2015)
\nLG
\n4
\nISBN
\n1-269-86847-0
\nPrinciples
\nof Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.
\nZutter. Published by Prentice Hall. Copyright \u00c2\u00a9 2015 by Pearson Education, Inc.
\n152
\nPART 2 Financial Tools
\n(2)
\nThe firm receives other income of $2,000 per month.
\n(3)
\nThe firm\u00e2\u0080\u0099s actual or expected purchases, all made for cash, are $50,000,
\n$70,000,
\nand $80,000 for the months of May through July, respectively.
\n(4)
\nRent is $3,000 per month.
\n(5)
\nWages and salaries are 10% of the previous month\u00e2\u0080\u0099s sales.
\n(6)
\nCash dividends of $3,000 will be paid in June.
\n(7)
\nPayment of principal and interest of $4,000 is due in June.
\n(8)
\nA cash purchase of equipment costing $6,000 is scheduled in July.
\n(9)
\nTaxes of $6,000 are due in June.<\/p>\n
P4\u00e2\u0080\u009315
\nPro forma income statement The marketing department of Metroline Manufacturing
\nestimates
\nthat its sales in 2016 will be $1.5 million. Interest expense is expected
\nto
\nremain unchanged at $35,000, and the firm plans to pay $70,000 in cash
\ndividends
\nduring
\n2016. Metroline Manufacturing\u00e2\u0080\u0099s income statement for the year ended
\nDecember
\n31, 2015, and a breakdown of the firm\u00e2\u0080\u0099s cost of goods sold and operating
\nexpenses
\ninto their fixed and variable components are given below.
\na.
\nUse the percent-of-sales method to prepare a pro forma income statement for the
\nyear
\nended December 31, 2016.
\nb.
\nUse fixed and variable cost data to develop a pro forma income statement for
\nthe
\nyear
\nended December 31, 2016.
\nc.
\nCompare and contrast the statements developed in parts a and b. Which statement
\nprobably
\nprovides the better estimate of 2016 income? Explain why.
\nISBN
\n1-269-86847-0
\nPrinciples
\nof Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.
\nZutter. Published by Prentice Hall. Copyright \u00c2\u00a9 2015 by Pearson Education, Inc.<\/p>\n
P4\u00e2\u0080\u009318
\nPro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It
\nwishes
\nto analyze expected performance and financing needs for 2017, which is
\n2
\nyears ahead. Given the following information, respond to parts a and b.
\n(1)
\nThe percents of sales for items that vary directly with sales are as follows:
\nAccounts
\nreceivable, 12%
\nInventory,
\n18%
\nAccounts
\npayable, 14%
\nNet
\nprofit margin, 3%
\n(2)
\nMarketable securities and other current liabilities are expected to remain
\nunchanged.<\/p>\n
(3)
\nA minimum cash balance of $480,000 is desired.
\n(4)
\nA new machine costing $650,000 will be acquired in 2016, and equipment
\ncosting
\n$850,000 will be purchased in 2017. Total depreciation in 2016 is
\nforecast
\nas $290,000, and in 2017 $390,000 of depreciation will be taken.
\n(5)
\nAccruals are expected to rise to $500,000 by the end of 2017.
\n(6)
\nNo sale or retirement of long-term debt is expected.
\n(7)
\nNo sale or repurchase of common stock is expected.
\n(8)
\nThe dividend payout of 50% of net profits is expected to continue.
\n(9)
\nSales are expected to be $11 million in 2016 and $12 million in 2017.
\n(10)
\nThe December 31, 2015, balance sheet follows.<\/p>\n
Assets
\nLiabilities and stockholders\u00e2\u0080\u0099 equity
\nCash
\n$ 400 Accounts payable $1,400
\nMarketable
\nsecurities 200 Accruals 400
\nAccounts
\nreceivable 1,200 Other current liabilities 80
\nInventories
\n1,800 Total current liabilities $1,880
\nTotal
\ncurrent assets $3,600 Long-term debt 2,000
\nNet
\nfixed assets 4,000 Total liabilities 3,880
\nTotal
\nassets $7,600 Common equity 3,720
\nTotal
\nliabilities and
\nstockholders\u00e2\u0080\u0099
\nequity $7,600
\nPeabody
\n& Peabody Balance Sheet December 31, 2015 ($000)
\na.
\nPrepare a pro forma balance sheet dated December 31, 2017.
\nb.
\nDiscuss the financing changes suggested by the statement prepared in part a.<\/p>\n
P5\u00e2\u0080\u00932
\nFuture value calculation Without referring to the preprogrammed function on
\nyour
\nfinancial
\ncalculator, use the basic formula for future value along with the given
\ninterest
\nrate,
\nr, and the number of periods, n, to calculate the future value of $1 in
\neach
\nof the cases shown in the following table.<\/p>\n
Case
\nInterest rate, r Number of periods, n
\nA
\n12% 2
\nB
\n6 3
\nC
\n9 2
\nD
\n3 4<\/p>\n
P5\u00e2\u0080\u00936
\nTime value As part of your financial planning, you wish to purchase a new car
\nexactly
\n5
\nyears from today. The car you wish to purchase costs $14,000 today, and
\nyour
\nresearch indicates that its price will increase by 2% to 4% per year over the
\nnext
\n5 years.
\na.
\nEstimate the price of the car at the end of 5 years if inflation is (1) 2% per
\nyear
\nand
\n(2) 4% per year.
\nb.
\nHow much more expensive will the car be if the rate of inflation is 4% rather
\nthan
\n2%?
\nc.
\nEstimate the price of the car if inflation is 2% for the next 2 years and 4%
\nfor
\n3
\nyears after that.<\/p>\n
P5\u00e2\u0080\u009314
\nTime value An Iowa state savings bond can be converted to $100 at maturity
\n6
\nyears from purchase. If the state bonds are to be competitive with U.S. savings
\nbonds,
\nwhich pay 8% annual interest (compounded annually), at what price
\nmust
\nthe state sell its bonds? Assume no cash payments on savings bonds prior
\nto
\nredemption.<\/p>\n
P5\u00e2\u0080\u009322
\nRetirement planning Hal Thomas, a 25-year-old college graduate, wishes to
\nretire at
\nage
\n65. To supplement other sources of retirement income, he can deposit $2,000
\neach
\nyear into a tax-deferred individual retirement arrangement (IRA). The IRA will
\nearn
\na 10% return over the next 40 years.
\na.
\nIf Hal makes annual end-of-year $2,000 deposits into the IRA, how much will he
\nhave
\naccumulated by the end of his sixty-fifth year?
\nb.
\nIf Hal decides to wait until age 35 to begin making annual end-of-year $2,000
\ndeposits
\ninto the IRA, how much will he have accumulated by the end of his
\nsixty-fifth
\nyear?
\nc.
\nUsing your findings in parts a and b, discuss the impact of delaying making
\ndeposits
\ninto
\nthe IRA for 10 years (age 25 to age 35) on the amount accumulated
\nby
\nthe end of Hal\u00e2\u0080\u0099s sixty-fifth year.
\nd.
\nRework parts a, b, and c, assuming that Hal makes all deposits at the
\nbeginning,
\nrather
\nthan the end, of each year. Discuss the effect of beginning-of-year deposits
\non
\nthe future value accumulated by the end of Hal\u00e2\u0080\u0099s sixty-fifth year.<\/p>\n
P5-29
\nValue of a single amount versus a mixed stream Gina Vitale has just contracted
\nto
\nsell a small parcel of land that she inherited a few years ago. The buyer is
\nwilling to
\npay
\n$24,000 at the closing of the transaction or will pay the amounts shown in the
\nfollowing
\ntable at the beginning of each of the next 5 years. Because Gina doesn\u00e2\u0080\u0099t
\nreally
\nneed the money today, she plans to let it accumulate in an account that earns
\n7%
\nannual interest. Given her desire to buy a house at the end of 5 years after
\nclosing
\non
\nthe sale of the lot, she decides to choose the payment alternative\u00e2\u0080\u0094$24,000
\nsingle
\namount
\nor the mixed stream of payments in the following table\u00e2\u0080\u0094that provides the
\nhigher
\nfuture value at the end of 5 years. Which alternative will she choose?
\nMixed
\nstream
\nBeginning
\nof year Cash flow
\n1
\n$ 2,000
\n2
\n4,000
\n3
\n6,000
\n4
\n8,000
\n5
\n10,000<\/p>\n
P5\u00e2\u0080\u009339
\nCompounding frequency and time value You plan to invest $2,000 in an individual
\nretirement
\narrangement (IRA) today at a nominal annual rate of 8%, which is expected
\nto
\napply to all future years.
\nLG
\n5
\nLG
\n5
\nLG
\n5
\nLG
\n5
\nISBN
\n1-269-86847-0
\nPrinciples
\nof Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.
\nZutter. Published by Prentice Hall. Copyright \u00c2\u00a9 2015 by Pearson Education, Inc.
\n214
\nPART 2 Financial Tools
\na.
\nHow much will you have in the account at the end of 10 years if interest is
\ncompounded
\n(1)
\nannually, (2) semiannually, (3) daily (assume a 365-day year), and
\n(4)
\ncontinuously?
\nb.
\nWhat is the effective annual rate (EAR) for each compounding period in part a?
\nc.
\nHow much greater will your IRA balance be at the end of 10 years if interest is
\ncompounded
\ncontinuously rather than annually?
\nd.
\nHow does the compounding frequency affect the future value and effective annual
\nrate
\nfor a given deposit? Explain in terms of your findings in parts a through c.<\/p>\n","protected":false},"excerpt":{"rendered":"
P4\u00e2\u0080\u00935 Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as\u2026<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7641,8827,10535,10533,10534,10531,10529,6744,10532,10530,7741],"tags":[10553,10549,10616,10615,7687,10254,10627,10104,10247,8857,10552,10295,10900,2984,3903,10548,10622,8901,10551,8907],"class_list":["post-126970","post","type-post","status-publish","format-standard","hentry","category-australia-essay-writers","category-australia-essays","category-do-my-university-assignment-for-me","category-essay-pro-dissertation-writers","category-homework-help-services-best-websites","category-i-need-help-writing-a-page-paper-assignment","category-masters-essays","category-nursing-studybay","category-pay-someone-to-write-a-paper-for-you","category-website-that-writes-assignments","category-studybay","tag-1-assignment-help-online-service-for-students-in-the-usa","tag-ai-plagiarism-free-essay-writing-tool","tag-australian-best-tutors","tag-best-trans-tutors","tag-buy-essay-uk","tag-can-someone-write-my-assignment-for-me","tag-cheap-dissertation-writer","tag-essypro","tag-help-me-write-my-dissertation","tag-help-with-writing-an-essay","tag-help-write-my-paper-ai-free","tag-homework-for-you","tag-nursing-bay","tag-nursing-essay","tag-nursing-study-bay","tag-online-essay-writers","tag-phd-essays","tag-studbay","tag-write-my-assignment-help-for-college-students","tag-write-my-essay-for-me"],"_links":{"self":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/126970","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/comments?post=126970"}],"version-history":[{"count":0,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/posts\/126970\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/media?parent=126970"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/categories?post=126970"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.studyproessays.com\/help\/wp-json\/wp\/v2\/tags?post=126970"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}