Question 1 (Financial forecasting)Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has been in business for only 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.

Last year Zapatera had $12million in sales, and net income of $1.2 million. The firm anticipates that next year’s sales will reach $15.0 million, with net income rising to $1.32 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.

The firm’s balance sheet for 2013 is found in the popup window:

Balance Sheet                       12/32/2013                       % of Sales

Current assets                         $3,000,000                       25%

Net fixed assets                        6,600,000                       55%

Total                                       $9,600,000

LIABILITIES AND OWNER’S EQUITY

Accounts payable                    $1,800,000                       15%

Long-term debt                          1,300,000                       NAa

Total liabilities                        $3,100,000                            

Common stock                           1,000,000                       NA

Paid-in capital                            4,300,000                       NA

Retained earnings                      1,200,000

Common equity                       6,500,000

Total                                         $9,600,000 

Questions: Estimate Zapatera’s financing requirements (that is, total assets) for 2014 and its discretionary financing needs (DFN). 

Question 2 (Percent of sales forecasting) which of the following accounts would most likely vary directly with the level of a firm’s sales? Discuss each briefly.

                                   Yes       No                                           Yes         No

Cash                 ___      ____       Notes payable           ____       ____

Marketable securities____    ____Plan and equipment _____     ____

Accounts payable_____   _____       Inventories_____     _____

Is cash likely to vary directly with the level of a firm’s sales? 

a.       No, cash receipts follow sales with a lag related to the payment habits of the firm’s customers and the firm’s policy regarding payments on its accounts payable. 

b.      Yes, cash receipts vary directly with sales and have a relation to the firm’s customer’s payment habit or the firm’s policy regarding payments on its accounts payable. 

Question 3 (Forecasting discretionary financing needs) Fishing Charter Inc. estimates that it invests $0.33 in assets for each dollar of new sale. However, $0.04 in profits are produced by each dollar of additional sales, of which $0.01 can be reinvested in the firm. If sales rise by $600.000 next year from their current level of $6 million, and the ratio of spontaneous liabilities to sales is 9 percent, what will be the firm’s need for discretionary financing? (Hint: In this situation you do not know what the firm’s existing level of assets is, nor do you know how spontaneous liabilities, retained earnings, and other sources of discretionary financing).

The firm’s need for discretionary financing is: $     (round to the nearest dollar)

Question 4 (Cash Budget)the Sharpe Corporation’s projected sales for the first 8 months of 2014 are shown in the following table:

January         $250,000                  May          $360,000

February         180,000                  June            330,000

March              195,000                 July             285,000

April                300,000                 August        210,000

Of Sharpe’s sales, 20 percent is for cash, another 40 percent is collected in the month following the sales, and 40 percent is collected in the second month following sales. November and December sales for 2013 were $280,000 and $235,000, respectively. Sharpe purchases its raw materials 2 months in advance of its sales. The purchases are equal to 50 percent of the final sales price of Sharpe’s products. The supplier is paid 1 month after it makes a delivery. For example, purchases for April sales are made in February, and payment is made in March. In addition, Sharpe pays $8,000 per month for rent and $16,000 each month for other expenditures. Tax prepayments of $22,000 are made each quarter, beginning in Mach.

The Company’s cash balance on December 31, 2013 was $25,000. This is minimum balance the firm wants to maintain. Any borrowing that is needed to maintain this minimum is paid off in the subsequent month if there is sufficient cash. Interest on short-term loans (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus, if in the month of April the firm expects to have a need for an additional $60,500, these funds would be borrowed at the beginning of April with interest of $605 (0.12x 1/12 x $60,500) owed for April and paid at the beginning of May. 

a.       Prepare a cash budget for Sharpe covering the first 7 months of 2014.

b.      Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes? 

a.       Prepare a cash budget for Sharpe covering the first 7 months of 2014.

Fill in the Collections for the month of January. (Round to nearest dollar) 

Question 5 (Cash conversion cycle) Sims Electric Corp, has been striving for the last 5 years to improve its management of working capital. Historical data for the firm ‘sales, accounts receivable, inventories, and accounts payable follow:

                                      JAN-10     JAN-11    JAN-12    JAN-13     JAN-14

Sales Net                       2,874         3,482       5,255        7,788        12,397

Receivables                      426           550          710           923           1,422   

Accounts payable             277           433          478          1,041         1,638

Inventories                        232           311          429            264             244 

a.       Calculate Sims’ days of sales outstanding, days of payables outstanding and days of sales in inventory for each of the 5 years. Assume a 365 day year. Hint: assume that the firm’s cost of goods sold equals 70% of sales. 

                                           JAN-10      JAN-11    JAN-12    JAN-13   JAN-14

Days of sales Outstanding (DSO)  

b.      Calculate Sim’s cash conversion cycle for each of the 5 years. Evaluate Sim’s overall management of its working capital. Assume a 365 day yea 

Question 6 (Cost of factoring) MDM Inc. is considering factoring its receivables. The firm has credit sales of $300,000 per month and has an average receivables balance of $600,000 with 60 day credit terms. The factor has offered to extend credit equal to 91 percent of the receivables factored less interest on the loan at a rate of 1.6 percent per month. The 9 percent difference in the advance and the face value of all receivables factored consists of a 2 percent factoring fee plus a 7 percent reserve, which the factor maintains. In addition, if MDM Inc. decides to factor its receivables, it will sell them all, so that it can reduce its credit department costs by $1,600 a month.

What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement? Note: Assume a 30 day month and 360 day year.

The cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement is     %. (Round to two decimal places).