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P4?5 Classifying inflows and outflows of cash -P4-5 P4-6 P4-9 P4-15 P4-18P5-2 P5-6 P5-14 P5-22 P5




Question;P4?5 Classifying inflows and outflows of cash Classify each of the;following items as an;inflow (I) or an outflow (O) of cash, or as neither (N).;LG 2;LG 2;Item Change ($) Item Change ($);Cash +100 Accounts receivable?700;Accounts payable?1,000 Net profits +600;Notes payable +500 Depreciation +100;Long-term debt?2,000 Repurchase of stock +600;Inventory +200 Cash dividends +800;Fixed assets +400 Sale of stock +1,000;P4?6 Finding operating and free cash flows Consider the following;balance sheets and;selected data from the income statement of Keith Corporation.;December 31;Assets 2015 2014;Cash $ 1,500 $ 1,000;Marketable securities 1,800 1,200;Accounts receivable 2,000 1,800;Inventories 2,900 2,800;Total current assets $ 8,200 $ 6,800;Gross fixed assets $29,500 $28,100;Less: Accumulated depreciation 14,700 13,100;Net fixed assets $14,800 $15,000;Total assets $23,000 $21,800;Liabilities and stockholders? equity;Accounts payable $ 1,600 $ 1,500;Notes payable 2,800 2,200;Accruals 200 300;Total current liabilities $ 4,600 $ 4,000;Long-term debt 5,000 5,000;Total liabilities $ 9,600 $ 9,000;Common stock $10,000 $10,000;Retained earnings 3,400 2,800;Total stockholders? equity $13,400 $12,800;Total liabilities and stockholders? equity $23,000 $21,800;Keith Corporation Balance Sheets;ISBN 1Depreciation;expense $1,600;Earnings;before interest and taxes (EBIT) 2,700;Interest;expense 367;Net;profits after taxes 1,400;Tax;rate 40%;a.;Calculate the firm?s net operating profit after taxes (NOPAT) for the year ended;December;31, 2015, using Equation 4.1.;b.;Calculate the firm?s operating cash flow (OCF) for the year ended December 31;2015;using Equation 4.3.;c.;Calculate the firm?s free cash flow (FCF) for the year ended December 31, 2015;using;Equation 4.4.;d.;Interpret, compare, and contrast your cash flow estimates in parts b and c.;P4?9;Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and;$60,000;in April. Forecast sales for May, June, and July are $70,000, $80,000, and;$100,000;respectively. The firm has a cash balance of $5,000 on May 1 and wishes;to;maintain a minimum cash balance of $5,000. Given the following data, prepare;and;interpret a cash budget for the months of May, June, and July.;(1);The firm makes 20% of sales for cash, 60% are collected in the next month;and;the remaining 20% are collected in the second month following sale.;LG;4;LG;4;Depreciation;expense $1,600;Earnings;before interest and taxes (EBIT) 2,700;Interest;expense 367;Net;profits after taxes 1,400;Tax;rate 40%;Keith;Corporation Income Statement Data (2015);LG;4;ISBN;1-269-86847-0;Principles;of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.;Zutter. Published by Prentice Hall. Copyright ? 2015 by Pearson Education, Inc.;152;PART 2 Financial Tools;(2);The firm receives other income of $2,000 per month.;(3);The firm?s actual or expected purchases, all made for cash, are $50,000;$70,000;and $80,000 for the months of May through July, respectively.;(4);Rent is $3,000 per month.;(5);Wages and salaries are 10% of the previous month?s sales.;(6);Cash dividends of $3,000 will be paid in June.;(7);Payment of principal and interest of $4,000 is due in June.;(8);A cash purchase of equipment costing $6,000 is scheduled in July.;(9);Taxes of $6,000 are due in June.;P4?15;Pro forma income statement The marketing department of Metroline Manufacturing;estimates;that its sales in 2016 will be $1.5 million. Interest expense is expected;to;remain unchanged at $35,000, and the firm plans to pay $70,000 in cash;dividends;during;2016. Metroline Manufacturing?s income statement for the year ended;December;31, 2015, and a breakdown of the firm?s cost of goods sold and operating;expenses;into their fixed and variable components are given below.;a.;Use the percent-of-sales method to prepare a pro forma income statement for the;year;ended December 31, 2016.;b.;Use fixed and variable cost data to develop a pro forma income statement for;the;year;ended December 31, 2016.;c.;Compare and contrast the statements developed in parts a and b. Which statement;probably;provides the better estimate of 2016 income? Explain why.;ISBN;1-269-86847-0;Principles;of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.;Zutter. Published by Prentice Hall. Copyright ? 2015 by Pearson Education, Inc.;P4?18;Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It;wishes;to analyze expected performance and financing needs for 2017, which is;2;years ahead. Given the following information, respond to parts a and b.;(1);The percents of sales for items that vary directly with sales are as follows;Accounts;receivable, 12%;Inventory;18%;Accounts;payable, 14%;Net;profit margin, 3%;(2);Marketable securities and other current liabilities are expected to remain;unchanged.;(3);A minimum cash balance of $480,000 is desired.;(4);A new machine costing $650,000 will be acquired in 2016, and equipment;costing;$850,000 will be purchased in 2017. Total depreciation in 2016 is;forecast;as $290,000, and in 2017 $390,000 of depreciation will be taken.;(5);Accruals are expected to rise to $500,000 by the end of 2017.;(6);No sale or retirement of long-term debt is expected.;(7);No sale or repurchase of common stock is expected.;(8);The dividend payout of 50% of net profits is expected to continue.;(9);Sales are expected to be $11 million in 2016 and $12 million in 2017.;(10);The December 31, 2015, balance sheet follows.;Assets;Liabilities and stockholders? equity;Cash;$ 400 Accounts payable $1,400;Marketable;securities 200 Accruals 400;Accounts;receivable 1,200 Other current liabilities 80;Inventories;1,800 Total current liabilities $1,880;Total;current assets $3,600 Long-term debt 2,000;Net;fixed assets 4,000 Total liabilities 3,880;Total;assets $7,600 Common equity 3,720;Total;liabilities and;stockholders?;equity $7,600;Peabody;Peabody Balance Sheet December 31, 2015 ($000);a.;Prepare a pro forma balance sheet dated December 31, 2017.;b.;Discuss the financing changes suggested by the statement prepared in part a.;P5?2;Future value calculation Without referring to the preprogrammed function on;your;financial;calculator, use the basic formula for future value along with the given;interest;rate;r, and the number of periods, n, to calculate the future value of $1 in;each;of the cases shown in the following table.;Case;Interest rate, r Number of periods, n;A;12% 2;B;6 3;C;9 2;D;3 4;P5?6;Time value As part of your financial planning, you wish to purchase a new car;exactly;5;years from today. The car you wish to purchase costs $14,000 today, and;your;research indicates that its price will increase by 2% to 4% per year over the;next;5 years.;a.;Estimate the price of the car at the end of 5 years if inflation is (1) 2% per;year;and;(2) 4% per year.;b.;How much more expensive will the car be if the rate of inflation is 4% rather;than;2%?;c.;Estimate the price of the car if inflation is 2% for the next 2 years and 4%;for;3;years after that.;P5?14;Time value An Iowa state savings bond can be converted to $100 at maturity;6;years from purchase. If the state bonds are to be competitive with U.S. savings;bonds;which pay 8% annual interest (compounded annually), at what price;must;the state sell its bonds? Assume no cash payments on savings bonds prior;to;redemption.;P5?22;Retirement planning Hal Thomas, a 25-year-old college graduate, wishes to;retire at;age;65. To supplement other sources of retirement income, he can deposit $2,000;each;year into a tax-deferred individual retirement arrangement (IRA). The IRA will;earn;a 10% return over the next 40 years.;a.;If Hal makes annual end-of-year $2,000 deposits into the IRA, how much will he;have;accumulated by the end of his sixty-fifth year?;b.;If Hal decides to wait until age 35 to begin making annual end-of-year $2,000;deposits;into the IRA, how much will he have accumulated by the end of his;sixty-fifth;year?;c.;Using your findings in parts a and b, discuss the impact of delaying making;deposits;into;the IRA for 10 years (age 25 to age 35) on the amount accumulated;by;the end of Hal?s sixty-fifth year.;d.;Rework parts a, b, and c, assuming that Hal makes all deposits at the;beginning;rather;than the end, of each year. Discuss the effect of beginning-of-year deposits;on;the future value accumulated by the end of Hal?s sixty-fifth year.;P5-29;Value of a single amount versus a mixed stream Gina Vitale has just contracted;to;sell a small parcel of land that she inherited a few years ago. The buyer is;willing to;pay;$24,000 at the closing of the transaction or will pay the amounts shown in the;following;table at the beginning of each of the next 5 years. Because Gina doesn?t;really;need the money today, she plans to let it accumulate in an account that earns;7%;annual interest. Given her desire to buy a house at the end of 5 years after;closing;on;the sale of the lot, she decides to choose the payment alternative?$24,000;single;amount;or the mixed stream of payments in the following table?that provides the;higher;future value at the end of 5 years. Which alternative will she choose?;Mixed;stream;Beginning;of year Cash flow;1;$ 2,000;2;4,000;3;6,000;4;8,000;5;10,000;P5?39;Compounding frequency and time value You plan to invest $2,000 in an individual;retirement;arrangement (IRA) today at a nominal annual rate of 8%, which is expected;to;apply to all future years.;LG;5;LG;5;LG;5;LG;5;ISBN;1-269-86847-0;Principles;of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.;Zutter. Published by Prentice Hall. Copyright ? 2015 by Pearson Education, Inc.;214;PART 2 Financial Tools;a.;How much will you have in the account at the end of 10 years if interest is;compounded;(1);annually, (2) semiannually, (3) daily (assume a 365-day year), and;(4);continuously?;b.;What is the effective annual rate (EAR) for each compounding period in part a?;c.;How much greater will your IRA balance be at the end of 10 years if interest is;compounded;continuously rather than annually?;d.;How does the compounding frequency affect the future value and effective annual;rate;for a given deposit? Explain in terms of your findings in parts a through c.


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