CH 13#6 [PDF]

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Prepared by: Joniel Maducdoc Subject: Financial Management 1 Professor: Mr. Trinidad Topic: Financial Planning Proble # 6 Given the information that follows, prepare a cash budget for the Central City Department Store for the first six months of 20x2 under the following assumptions: a. All prices and costs remain constant b. Sales are 75% for credit and 25% for cash c. In terms of credit sales, 60% are collected in the month after the sales, 30% in the 2nd month, and 10% in the 3rd. Bad debt losses are insignificant d. Sales, actual and estimated, are october 20x1 November 20x1 December 20x1 January 20x2 February 20x2



$ 300,000 350,000 400,000 150,000 200,000



March 20x2 AprilAp 20x2 May 20x2 June 20x2 July 20x2



$ 200,000 300,000 250,000 200,000 300,000



e. Payments for purchases of merchandise are 80% of the following month's anticipated sales f. Wages and salaries are January February



$ 30,000 40,000



March April



$ 50,000 50,000



May June



$ 40,000 35,000



g. Rent is $ 2,000 a month h. Interest of $ 7,500 is due at the end ofeach calendar quarter i. A tax prepayment on 20x2income of $50,000 is due in April j. A capital investment of $ 30,000 is planned in June k. The company has a cash blance of $ 100,000 at December 31, 20x1, which is the minimum desired level for cash. Funds can be borrowed in multiples of $5,000 on a monthly basis. (Ignore interest on such borrowings)



JSM page 2 Soln: Schedule of sales receipt



Tot Sales credit sales @75%



Oct 300000



Nov 350000



Dec 400000



Jan 150000



Feb 200000



Mar 200000



Apr 300000



May 250000



Jun 200000



Jul 300000



225000



262500



300000



112500



150000



150000



225000



187500



150000



225000



135000



157500



180000



67500



90000



90000



135000



112500



90000



67500



78750



90000



33750



45000



45000



67500



56250



22500



26250



30000



11250



15000



15000



22500



281250 37500



183750 50000



153750 50000



146250 75000



195000 62500



195000 50000



168750 75000



318750



233750



203750



221250



257500



245000



243750



Collection,1st mo @60% collection, 2nd mo @30% collection, 3rd mo @10% Total collection Cash sales Total sales receipt Proceeds of loan Total cash receipts



0



135000



225000



20000 318750



233750 203750



241250



257500



245000



243750



Schedule of disbursement Oct purchase (80% of the ff month's sales) wages other expenses CAPEX dividend payments Income taxes Total cash disbursement



Nov



Dec



Jan



280000



320000



120000



160000 30000



2000



2000



2000



2000



Feb



Mar



160000 240000 40000 50000 2000



9500



Apr



May



160000 40000



240000 35000



0



2000



2000



9500 30000



2000



202000



314500



50000 192000



202000 299500



Jan Feb Mar 318750 233750 203750 192000 202000 299500 126750 31750 -95750 100000 226750 258500



Jul



200000 50000



302000



Net Cash flow and Cash balance Total cash receipt Total cash disbursement Net cash flow Beginning cash w/o financing



Jun



Apr May Jun 241250 257500 245000 302000 202000 314500 -60750 55500 -69500 162750 102000 157500



Ending cash w/o financing



226750



258500



162750 102000



157500



88000



JSM page3 Chapter 15: Credit Policies Prob #1: To increase sales from their present annual $24 mil, Jefferson Knu Monroe Co., a wholesaler, may try more liberal credit standards. Currently, the firm has an average collection period of 30 days. It believes that with increasing liberal credit standards, the ff will result: Credit Policy Increase in sales from previous level (millions) Average collection period for incremental sales (dsys)



A



B



C



D



$2.80



1.8



1.2



0.6



45



60



90



144



the price of the products average $20 per unit, and variable costs average $18 per unit. No bad debt losses are expected. If the company has a pretax opportunoty cost of funds of 30%, which credit policy should be pursued?(assume 360 day year) Soln: Present: # of units sold @ $20/unit variable cost = $18



0.9



A Increase in sales from previous level (millions) Average collection period Turn over ratio Profitability of addt'l sales (CM*# units sold) Additional receivables (addtl sale/TOR) Investment in addtl receivables (var cost/price)(addtl receivables) Required return on addtl invstmnt



B



C



D



2.8



1.8



1.2



0.6



45 8



60 6



90 4



144 2.5



280000



180000



120000



60000



350000



300000



300000



240000



315000



270000



270000



216000



94500 81000 81000 64800 185500 99000 39000 -4800 Therefore it is advisable to choose Policy A because amongts the four policy Policy A has the greatest returns. prob # 2 Upon reflection, Jefferson Knu Monroe has estimated that the following pattern of bad debt losses will prevail if it initiates more liberal credit terms: Credit policy



A



B



C



D



bad-debt losses on incremental sales



3.00%



6%



Which policy now is best? JSM page 4 Soln: In millions Credit Policy Increase in sales from previous level (millions) Average collection period for incremental sales (dsys) bad-debt losses on incremental sales Turn over Ratio Profitability of addtl sales (30%) ,(mil.) Additional bad-debt losses (mil) (addtl sales*bad-debt %) Additional receivables (mil) (addtnl sales/TOR) Investment in addtl receivables Required return on addtl investment(30%) Bad-debt losses + addtl required return Incremental profitabilitty (profitability of addl sales minus bad-debt losses plus required return)



A



B



C



D



$2.80



1.8



1.2



0.6



45 3.00% 8 $0.840



60 6% 6 $0.540



90 10% 4 $0.360



144 15.00% 2.5 $0.180



$0.084



$0.108



$0.120



$0.090



$0.350 $0.315 $0.095 $0.179



$0.300 $0.270 $0.081 $0.189



$0.300 $0.270 $0.081 $0.201



$0.240 $0.216 $0.065 $0.155



$0.662



$0.351



$0.159



Considering marginal revenue, Policy A is a good option to regain additonal sales.



$0.025



10%



15.00%



Submitted by: Joniel Maducdoc Beverly Castro Marjiel Reballos



Date: Apr 04, 2011 Subject: Financial Management Topic: Inventory Management Professor: Mr. Trinidad



Proble# 10 Favorite Foods, Inc., buys 50,000 of boxes of ice cream cones every 2 months to service steady demand for the product. Order costs are $100 per order, and carrying costs are $0.40 per box. a. Determine the optimal order quantity b. The vendor now offers Favorite Foods a quantity discount of $ .02 per box if it buys cones in order sizes of 10,000 boxes. Should Favorite Foods avail itself of the quantity dicsouunt? (Hint: Determine the increase in carrying cost and decrease in ordering cost relative to your answer in part a. Compare these with the total savings available through the quantity discount.) A.



EOQ







2 AO C



A= 50,000 every 2 months O= $100 C= $.4 Use direct substitution: EOQ= 5000 units B. Assume $1 cost per cone Order Size Average Annual Inventory Reqt (units) 5,000 10,000



2,500 5,000



300,000 300,000



No. of orders (3 divided 1)



60 30



Cost of purchase (3) X (5) 300,000 294,000



Carrying cost



Ordering Cost



Total Cost



at . $.4 per



at $100



(6+ 7 + 8)



unit



per order



1,000 2,000



Since availing of the discount would mean lesser cost, it is practical to grab the offfer



6,000 3,000



307,000 299,000



Grp#4



Simplified Solution: Total Carrying cost, $



Order Size Total # of Total orders, Ordering quantity Cost, $ (1) 5,000 10,000



(2) (3) 50000/(1) (2)*100 10 1,000 5 500



Total Cost Discount, Final Cost, $ per order, $ $



(4) (5) Ave inv*.4 (3)+(4) 1000 2,000 2000 2,500



(6) 0 1,000



(7) (5)-(6) 2,000 1,500



Therefore, FFI can avail the quantity discount due to savings it can bring to their company.



Prob#11 Fouchee Scents, Inc., makes various scents for use in the manufacture of food products. Although the company does maintain a safety stock, it has a policy of " lean" inventories, with the result that customers sometimes must be turned away. In an analysis of the situation, the company has estimated the cost of being out of stock associated with various levels of stock out:



Safety Stock Level Present New level 1 New level 2 New level 3 New level 4 New level 5



Level of Safety Stock (gal) 5000 7500 10000 12500 15000 17500



Annual Cost of stockouts, $ 26000 14000 7000 3000 1000 0



Carrying costs are $5.65 per gal per year. What is the best level of safety stock for the company? Get Total Carrying cost per level



Grp#4 Safety Stock Level (1) Present New level 1 New level 2 New level 3 New level 4 New level 5



Level of Safety Stock (gal) (2) 5000 7500 10000 12500 15000 17500



Annual Cost of stockouts, $ % Satisfied (3) _(4) $26,000.00 $14,000.00 $7,000.00 $3,000.00 $1,000.00 $0.00



0.00% 46.15% 73.08% 88.46% 96.15% 100.00%



Carrying Cost, $ (5) $28,250.00 $42,375.00 $56,500.00 $70,625.00 $84,750.00 $98,875.00



Total lost, $ (3)+(5) $54,250.00 $56,375.00 $63,500.00 $73,625.00 $85,750.00 $98,875.00



% inc on cost (6) 0.00% 3.92% 17.05% 35.71% 58.06% 82.26%



From the data, we can see that at almost 4% increaae on total lost, we can gain more than 45% of losses due to stock out, thus level 1 is a the preferred choice. Soln if the carrying cost is $0.65 only



Safety Stock Level (1) Present New level 1 New level 2 New level 3 New level 4 New level 5



Level of Safety Stock (gal) (2) 5000 7500 10000 12500 15000 17500



Annual Cost of stockouts, $ (3) $26,000.00 $14,000.00 $7,000.00 $3,000.00 $1,000.00 $0.00



Carrying Cost, $ (5) $3,250.00 $4,875.00 $6,500.00 $8,125.00 $9,750.00 $11,375.00



Total lost, $ (3)+(5) $29,250.00 $18,875.00 $13,500.00 $11,125.00 $10,750.00 $11,375.00



Using the new carrying cost, it appears that New level 4 is the best choice because it has the lowest total cost



Prepared by: Joniel Maducdoc Topic: Liquididty and Working Capital Mnagement Date : 04/11/2011



Submitted to: Mr.Trinindad



Prob # 1 Speedway owl Co., franchises Gas and Go stations in North Carolina and Virginia. All payments by franchisees for gasoline and oil products are by check, which average in total $420,000 a day. At present, the overall time between a check being mailed by the franchisee to Speedway Owl and the company having available funds at its bank is 6 days. a. How much money is tied up In this interval of time? 420000 X 6 = 2520000



b. To reduce this delay, the company is considering daily pick-ups from the station. In all, two cars would be needed and two additional people hired. The cost would be $93,000 annually. This procedure would reduce the overall delays by 2 days. Currently, the opportunity cost of funds is 9 percent, that being the interest rate on marketable securities. Should the company inaugurate the pick-up plan? Opprtunity cost= .09*420000 (420000*2)-93000-opportunity cost Therefore, they shoud avail the offer



=



709200 savings



c. Rather than mail checks to its bank, the company could deliver them by messenger service. This procedure would reduce the overall delay by 1 day ansd cost $10,300 annually. Should the company undertake this plan? 420000*1 = 420000 savings=420000-10300 = No. savings is lesser than average collection



409700



prob#2 Topple Tea houses, Inc., operates seven restaurants in the state of Pennsylvania. The manager of each restaurants transfers funds daily from the local bank to the company's principal bank in harrisburg. There arew approximately 250 bussiness days during a year in which transfers occur. Several methods of transfer are available. A wire transfer results in immediate availability of funds, buut the local banks charge $5 per wire transfer. A transfer through an automatic clearing house involves next day settlement, or a 1 day delay, and cost $3 per transfer. Finally, a mail-based depository transfer check arrangement cost $.3 per transfer, and mailing times result in a 3-day delay on average for the transfer to occur. ( This experience is the same for each res taurant.) The company presently uses depository transfer checks for all transfers. The restaurants have the following daily average remittances:



Restaurant Remittance



1 $3,000



2 4600



3 2700



4 5200



5 4100



6 3500



7 3800



a. If the opportunity cost of funds is 10%, which transfer procedure should be used for each restaurants? b. If the opprtunity cost of funds were 5%, what would be the optimal strategy? Soln to A. using depository transfer check (procedure1) (1) Restaurant (2) Remittance



(3) Opportunity cost



(4) Transfer cost



(5) Nos. of delays



250*.3



1 2 3 4 5 6 7



$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800



0.1 0.1 0.1 0.1 0.1 0.1 0.1



$75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0



3 3 3 3 3 3 3



(6) Opportunity Cost



(7) total cost



(2)*(5)*(3)



(4)+(6)



$900 $1,380 $810 $1,560 $1,230 $1,050 $1,140



$975.0 $1,455.0 $885.0 $1,635.0 $1,305.0 $1,125.0 $1,215.0



Using wire transfer (procedure 2)



(1) Restaurant (2) Remittance



(3) Opportunity cost



(4) Transfer cost



(5) Nos. of delays



250*5



1 2 3 4 5 6 7



$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800



0.1 0.1 0.1 0.1 0.1 0.1 0.1



$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0



0 0 0 0 0 0 0



(6) Opportunity Cost



(7) total cost



(2)*(5)*(3)



(4)+(6)



$0 $0 $0 $0 $0 $0 $0



$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0



Using automatic clearing house (procedure 3)



(1) Restaurant (2) Remittance



(3) Opportunity cost



(4) Transfer cost



(5) Nos. of delays



250*3



1 2 3 4 5 6 7



$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800



0.1 0.1 0.1 0.1 0.1 0.1 0.1



$750.0 $750.0 $750.0 $750.0 $750.0 $750.0 $750.0



(6) Opportunity Cost



(7) total cost



(2)*(5)*(3)



(4)+(6)



1 1 1 1 1 1 1



$300 $460 $270 $520 $410 $350 $380



Therefore best procedure for the restaurants are as follows: Restaurant 1 2 3



4



$1,050.0 $1,210.0 $1,020.0 $1,270.0 $1,160.0 $1,100.0 $1,130.0



5



6



7



Procedure



1



3



1



2



3



3



7



6 1



7 1



Using 5% opportunity cost



(1) Restaurant (2) Remittance



(3) Opportunity cost



(4) Transfer cost



(5) Nos. of delays



250*.3



1 2 3 4 5 6 7



$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800



0.05 0.05 0.05 0.05 0.05 0.05 0.05



$75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0



3 3 3 3 3 3 3



(6) Opportunity Cost



(7) total cost



(2)*(5)*(3)



(4)+(6)



$450 $690 $405 $780 $615 $525 $570



$525.0 $765.0 $480.0 $855.0 $690.0 $600.0 $645.0



Using wire transfer (procedure 2)



(1) Restaurant (2) Remittance



(3) Opportunity cost



(4) Transfer cost



(5) Nos. of delays



250*5



1 2 3 4 5 6 7



$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800



0.05 0.05 0.05 0.05 0.05 0.05 0.05



$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0



0 0 0 0 0 0 0



(6) Opportunity Cost



(7) total cost



(2)*(5)*(3)



(4)+(6)



$0 $0 $0 $0 $0 $0 $0



$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0



Using automatic clearing house (procedure 3)



(1) Restaurant (2) Remittance



(3) Opportunity cost



(4) Transfer cost



(5) Nos. of delays



250*3



1 2 3 4 5 6 7



$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800



(4)+(6)



$150 $230 $135 $260 $205 $175 $190



$900.0 $980.0 $885.0 $1,010.0 $955.0 $925.0 $940.0



Therefore best procedure for the restaurants are as follows: Restaurant 1 2 3 Procedure 1 1 1



4 1



5 1



(PV,ROI,ROR,IRR,NPV)



$750.0 $750.0 $750.0 $750.0 $750.0 $750.0 $750.0



(7) total cost



(2)*(5)*(3)



1 1 1 1 1 1 1



prob#3



0.05 0.05 0.05 0.05 0.05 0.05 0.05



(6) Opportunity Cost



The following are exrecises in present values. a. $100 at the end of 3 years is worth how much today, assuming a discount rate of (1) 10%? (2) 100%? (3) 0%? b. What is the aggregate present value of $ 500 received at the end of each of the next 3 years, assuming a discount rate of (1) 4%? (2)25%? c. $100 is received at the end of 1 year, $500 at the end of 2 years, and $1000 at the end of 3 years. What is the aggregarte present value of these receipts, assuming a discount rate of (1) 4%? (2) 25%? d. $1,000 is to be received at the end of 1 year, $500 at the end of 2 years, and $100 at the end of 3 years. What is the aggregate present value of these receipts, assuming a discount rate of (1) 4% (2)25%? e. Compare solutions in part c with those in part d and explain the reason for differences. Soln a.



PV= A/(1+k)rt3



b.



PV= A/(1+k)rt3



c.@4% @25%



PV = 100/1.04 + 500/(1.04)rt2 + 1000/(1.04)rt3 PV = 100/1.25 + 500/(1.25)rt2 + 1000/(1.25)rt3



= =



1447.428 976.6154



d.@4% @25%



PV = 1000/1.04 + 500/(1.04)rt2 + 100/(1.04)rt3 PV = 1000/1.25 + 500/(1.25)rt2 + 100/(1.25)rt3



= =



1512.716 1235.815



e.



Difference between the last exercises happened due to difference of initial amount



at 10% = at 100% = at 4% = at 25% =



75.13148 12.5 444.4982 256



at 0%=



100



Prb#4 The following are exercises on internal rates of return a. An investment of $1000 today will return $2000 at the end of 10 years. What is the IRR 1000=2000/(1+r)10



r= (2)(1/10)-1 0.07718 or 7.72%



b. An investment of $1000 today will return $500 at the end of each of the next 3 years. What is the IRR? disc rate disc factor csh flo pv of stream 23 2.0114 500 1005.7 24 1.9814 500 990.7 using 23%=2.0114 use interpolation: 5.7/15=.38=23+.38 23.38



c. An investment of $1000 today will return $ 1000 at the end of 1 year, $500 at the end of 2 yrs, and $100 at the end of 3 yrs. What is its IRR/ same as b. assume 2 dis rate 40 and 41% 40.616% ans



d. An investment of $1000 will return $60 per yr forever. What is its IRR? 60/1000=6%



Prepared by: Joniel Maducdoc Grp 4 Topic: Short/Medium Term Financing Secured loan Arrangement



Date: April 18, 2011 Professor: Mr. Trinidad



Prob#1 The Bone Com., has been factoring its accounts receivables for the past 5 yrs. The factor charges a fee of 2% and will lend up to 80% of the volume of receivables purchased for an additonal 1.5% per month. The firm typically has sales of $500,000 per month, 70% of which are on credit. By using the factor, two savings are effected: a. $2,000 per month that would be required to support a credit department b. A bad-debt expense of 1% on credit sales The firm's bank has recently offered to lend the firm up to 80% of the face value of the receivables shown on the schedule of accounts. The bank would charge 15% per annum interest plus a 2% monthly processing charge per dollar of recevables lending. The firm extends terms of net 30, and all customers who pay their bills do so in 30 days. Should the firm discontinue its factoring arrangement in favor of the banks's offer if the firm borrows,on the average, $100,000 per month on its receivables? Soln: Factoring cost = factoring fee + interest charge if the firm draws on its account before the receivables are collected Total receivables = (500000*.7) = 350000



9800



Factoring fee = .02*total receivabes = 7000 Lending fee = .015 * (100000) = 1250 total factoring fee= 8250 bank financing Total receivables=



=500000*.7 350000 Bank charge= 15% per annum = Processing fee=.02*100000 = Addtnl cost=2000+1%bad debt = total bank finance cost =



1250 2000 5500 8750



based on the cost analysis, the company should continue their engagement with the factor