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I-Asgns9

By Helen Scott,2014-07-18 20:18
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I-Asgns9

    LESSON 9 Suggested solutions

    Question 1 (40 marks)

    ABCDEFGHIJKLFN1: LESSON 9: QUESTION 1:SOLUTION1CGA-CANADA234Seasonal Clothings Limited Cash Budget5ENTER DATA: (in ?000s)67(1) Sales cash flows:8% of monthly sales received within a month10%9% of monthly sales received in 30 days60%10% of monthly sales received in 60 days30%1112(2) Purchases (% of sales of 2 months following)80%1314(3) Administrative expenses (per month)? 5015- bonus (paid each Feb.) % of 4th quarter sales6%1617(4) Fixed Payments:18- Dividend in March? 7519- Tax payment on January 15th? 152021(5) Wages and Salaries:22- percentage of sales16%23- minimum? 1002425(6) Bank Line of Credit:26Maximum Line of Credit? 50027Revolving amount? 502829(7) Minimum acceptable cash balance? 60303132(in ?000s)OCTNOVDECJANFEBMARAPRMAYJUNE33CASH RECEIPTS:3435Sales80060048080040024080056056036Collections37 One Month80604880402480565638 Two months48036028848024014448033639 Three months2401801442401207224040Total Collections80540648548664504344608632414243PURCHASES384640320192640448448004445CASH DISBURSEMENTS46Accounts Payable384640320192640448448047Sales Salaries12810010012810010012810010048Admin. Expenses505050501635050505049Taxes1550Dividends7551Total Disbursements178534790513455865626598150525354(in ?000s)DECJANFEBMARAPR55SUMMARY CASH FLOW:5657Opening Cash Balance60953049358Cash Receipts for the Month54866450434459Less:60Cash Disbursements for Month5134558656266162Accumulated Cash Flow95304(57)(189)6364Increase/decrease in revolving loan0015025065Closing cash balance609530493616667Calculations for revolving loan amounts:6869Loan amount needed for the month0015025070Max. amount available for repayment02000071Actual amount of loan to be repaid000072Increase/decrease in revolving loan0015025073Balance in revolving loan00015040074

    Corporate Finance Fundamentals Suggested solutions 9 1

Formula printout

    HIJFEBMARAPR33343550301003637=G36*$H$9=H36*$H$9=I36*$H$938=F36*$H$10=G36*$H$10=H36*$H$1039=E36*$H$11=F36*$H$11=G36*$H$1140=ROUND(SUM(H38:H40),0)=ROUND(SUM(I38:I40),0)=ROUND(SUM(J38:J40),0)414243=I36*$H$13=J36*$H$13=K36*$H$13444546=H44=I44=J4447=IF(H36*$H$23>=$H$24,H36*$H$23,$H$24)=IF(I36*$H$23>=$H$24,I36*$H$23,$H$24)=IF(J36*$H$23>=$H$24,J36*$H$23,$H$24)48=$H$15+SUM(D36:F36)*$H$16=$H$15=$H$154950=H1951=ROUND(SUM(H47:H51),0)=ROUND(SUM(I47:I51),0)=ROUND(SUM(J47:J51),0)525354JANFEBMAR555657=G66=H66=I6658=G41=H41=I415960=G52=H52=I526162=H58+H59-H61=I58+I59-I61=J58+J59-J616364=H73=I73=J7365=H63+H65=I63+I65=J63+J6566676869=IF(H63<$H$30,INT(($H$30-H63)/$H$28+1)*$H$28,0)=IF(I63<$H$30,INT(($H$30-I63)/$H$28+1)*$H$28,0)=IF(J63<$H$30,INT(($H$30-J63)/$H$28+1)*$H$28,0)70=IF(H63<H28+H30,0,INT((H63-H30)/H28)*H28)=IF(I63<H28+H30,0,INT((I63-H30)/H28)*H28)=IF(J63<H28+H30,0,INT((J63-H30)/H28)*H28)71=IF(H71<G74,-H71,-G74)=IF(I71<H74,-I71,-H74)=IF(J71<I74,-J71,-I74)72=IF(H70+H72+G74<$H$27,H70+H72,#VALUE!)=IF(I70+I72+H74<$H$27,I70+I72,#VALUE!)=IF(J70+J72+I74<$H$27,J70+J72,#VALUE!)73=G74+H73=H74+I73=I74+J7374

Question 2 (10 marks)

    Multiple choice (1 mark each) a. 3) Lesson Notes, Topic 9.1 b. 1) Lesson Notes, Topic 9.8 c. 2) Lesson Notes, Topic 9.8

    Beg. Cash balance ? 105,000 April September: ?75,000 40,000 30,000 = ?5,000 ; 6 = 30,000

     ? 135,000

    October: ? 75,000 80,000 30,000 = (?35,000) (35,000)

     ? 100,000 November December: (?35,000) ; 2 = (?70,000)

    Therefore the firm needs to borrow ?70,000 on November 1.

    d. 4) Lesson Notes, Topic 9.6 e. 4) Lesson Notes, Topic 9.5 f. 1) Lesson Notes, Topic 2.3 Corporate Finance Fundamentals Suggested solutions 9 2

g. 4) Lesson Notes, Topic 9.4

    h. 2) Lesson Notes, Topic 9.4

    i. 2) Lesson Notes, Topic 9.8

    j. 4) Lesson Notes, Topic 9.6

Question 3 (10 marks)

    a. (3 marks)

    Order ?5 million each restocking:

    Average cash = ?2.5 million

    Total carrying cost per year = 2.5(0.08) = ?0.200 million

# of restockings/year = 50/5 = 10

    Total annual restocking cost = 10(0.02) = ?0.200 million

Total cost = ?0.400 million per year.

b. (3 marks)

    Order ?8 million each restocking:

    Average cash = ?4 million

    Total carrying cost per year = 4(0.08) = ?0.320 million

# of restockings/year = 50/8 = 6.25

    Total annual restocking cost = 6.25(0.02) = ?0.125 million

Total cost = ?0.445 million per year.

c. (4 marks)

    Thus, the optimal restocking amount appears to be ?5 million. Notice that this exactly equals the optimal “EOQ” amount from inventory theory. Increasing the order size from

    ?3 million to ?5 million raised the average cash, and therefore raised the carrying cost.

    But, this was more than offset by placing fewer orders each year (10 instead of 16.667),

    lowering total cost.

    In going from restocking with ?5 million to ?8 million, however, the additional carrying costs (0.120 million) more than offset the reduced restocking cost (0.075 million),

    leading to higher costs with ?8 million restocking.

Thus, ?5 million is the best restocking level.

Question 4 (15 marks)

    365/40n Cost of foregoing discount = (1+2/98) 1 = 20.24%

The firm should borrow at the bank at 10% on a discount basis giving an effective rate

    of .1/.9 = 11.11%.

    Borrowing from the bank is better

    Corporate Finance Fundamentals Suggested solutions 9 3

Question 5 (15 marks)

    a. (5 marks)

    Rebar’s customers will pay their bills on the 60th day (after receiving the goods), so that

    the average collection period (ACP) should be 60 days.

As shown in Example 9.2 of the Lesson Notes:

AR = ACP ; CSPD

    where ACP = 60 days and CSPD = [200,000(6.00)]/365 = 3,287.67

so that AR = (60)(3287.67) = ?197,260.27.

b. (10 marks)

    Rebar’s profit per wedgie is ?0.18, or 0.18/6 = 3%. Thus, it can offer, at best, credit terms of 3/10 net 45.

    The effective borrowing rate (Lesson Notes, Topic 9.7) is:

    (365/35)10.4286[1/(1 0.03)] 1 = (1/0.97) 1 = 37.39%

Thus, if Rebar’s customers’

    borrowing rate < 0.3739 ==> pay Rebar bills on day 10

    borrowing rate > 0.3739 ==> pay Rebar bills on day 45

A customer with a borrowing rate of 37.39% will be indifferent between paying her bill

    on day 10 or on day 45.

The new Rebar accounts receivable will be:

    AR = ACP ; CSPD = (10)[400,000(6)/365] = 10[6575.34]

    AR = ?65,753.42

a drastic reduction from the old policy.

The big problem with the new trade credit terms is that Rebar makes no profits, which is

    not very good. If, because of the sales increase, total unit cost dropped to ?5.70, the new

    operating profit is 400,000 [6 3% of 6 5.70] = ?48,000, versus an old operating profit of 200,000(6 5.82) = ?36,000. With higher profit and lower accounts receivable carrying costs, this would be better.

Corporate Finance Fundamentals Suggested solutions 9 4

Question 6 (10 marks)

    Under Plan A for January:

    Assets: Liabilities and equity:

    Excess cash 160 Bank loan 0

    CA 10 TP + AP 5

    FA 100 LTD + EQ 265

Total 270 Total 270

Under Plan A for July:

    Assets: Liabilities and equity:

    Excess cash 0 Bank loan 0

    CA 185 TP + AP 20

    FA 100 LTD + EQ 265

Total 285 Total 285

Under Plan B for January:

    Assets: Liabilities and equity:

    Excess cash 0 Bank loan 0

    CA 10 TP + AP 5

    FA 100 LTD + EQ 105

Total 110 Total 110

Under Plan B for July:

    Assets: Liabilities and equity:

    Excess cash 0 Bank loan 160

    CA 185 TP + AP 20

    FA 100 LTD + EQ 105

Total 285 Total 285

Compare and contrast:

    Plan A uses all long-term financing, as in Plan A in Exhibit 9-1. Thus, in January, there are large excess cash balances. However, in July, no bank loans are required. This plan has the benefit of avoiding costly bank loans but carries excess cash, which most likely cannot be invested at a rate that reflects what other assets in the firm earn.

    Plan B, as in Plan B in Exhibit 9-1, has no excess cash in January, which is good (as argued above), but must rely on expensive bank loans in July, which is bad. Depending upon the costs of these advantages and disadvantages, a firm might use Plan A, Plan B, or some compromise.

     100

Corporate Finance Fundamentals Suggested solutions 9 5

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