Ch. 7.7-27 Cash Budgeting
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?
Ch. 7.7-30 Sales Budget
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.
Ch. 9P4–6 Finding operating and free cash flows
Consider the following balance sheets and selected data from the income statement of Keith Corporation.
Keith Corporation Balance Sheets
Keith Corporation Balance SheetsAssets / December 31
2012 2011
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 Income Statement Data (2012)
Depreciation expense / $1,600
Earnings before interest and taxes (EBIT) / 2,700
Interest expense / 367
Net profits after taxes / 1,400
Tax rate / 40%
1)Calculate the firm’s net operating profit after taxes (NOPAT) for the year endedDecember 31, 2012, using Equation 1.
NOPAT = EBIT x (1-t)
2)Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2012, using Equation 3.
OCF = NOPAT + depreciation
3)Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2012,using Equation 5.
FCF = OCF - net fixed asset investment - net current asset investment
Net fixed asset investment = change in net fixed assets + depreciation
Net current asset investment = change in current assets - change in (accounts payable and accruals.
4)Interpret, compare, and contrast your cash flow estimates in parts b and c.
Ch. 11P9-4 Cost of Debt using the approximation formula. For each of the $1,000 par-value bonds, assuming annual interest payment and a 40% tax rate, calculate the after-tax cost to maturity using the approximation formula.
Discount (-) or / Coupon InterestBond / Life / Underwriting fee / Premium (+) / Rate
A / 20 yrs / $25 / ($20) / 9%
B / 16 / 40 / $10 / 10
C / 15 / 30 / ($15) / 12
D / 25 / 15 / par / 9
E / 22 / 20 / ($60) / 11
Ch 12.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?