13-19

Various and Capital Structures: Charter Enterprises currently has $1 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change). Is there a limit to the debt ration value?

Ratio / Debt / Equity
10% / $ 100,000 / $ 900,000
20% / $ 200,000 / $ 800,000
30% / $ 300,000 / $ 700,000
40% / $ 400,000 / $ 600,000
50% / $ 500,000 / $ 500,000
60% / $ 600,000 / $ 400,000
90% / $ 900,000 / $ 100,000

As such there is no limit, but the EBIT EPS indifference point decides at which the ratio of debt will have no impact, and if the debt is above that limit the EPS will be better and if below the limit the EPS will be lower, it means that the ratio of debt and equity should be more than the limit.

7-27

Blake Henderson and Anna Kraft are preparing a plan to submit to venture capitalist to fund their business, Music Masters. The company plans to spend $380,000 on equipment in the first quarter of 2008. Salaries and other operating expenses (paid as incurred) will be $35,000 per month beginning in January 2008 and will continue at that level thereafter. The company will receive its first revenues in January 2009, with cash collections averaging $30,000 per month for all of 2009. In January 2010, cash collections are expected to increase to $100,000 per month and continue at that level thereafter. Assume that the company needs enough funding to cover all its cash needs until cash receipts start exceeding cash disbursements. How much venture capital funding should Blake and Anna seek?

380000+35000*12+60000 = $860000 will be needed.

Revenues / Expense
2009 / 360000 / 420000 / -60000
Jan-10 / 100000 / -35000 / 65000

7-30

Suppose a lumber yard has the following data:

  • Accounts receivable, May 31: (.3 X May sales of $350,000)=$105,000
  • Monthly forecasted sales: June, $430,000; July, $440,000; August, $500,000; September, $530,000

Sales consist of 70% cash and 30% credit. All credit accounts are collected in the month following the sales. Uncollectible accounts are negligible and may be ignored.

Prepare a sales budget schedule and a cash collections budget schedule for June, July and August.

Sales Budget / June / July / Aug
Sales / 430000 / 440000 / 500000
Cash collection / June / July / Aug
70% / 301000 / 308000 / 350000
30% / 105000 / 129000 / 132000
Total Collection / 406000 / 437000 / 482000