Module 3- Financial Planning and Growth – Financial Management

.pdf

School

Thompson Rivers University *

*We aren’t endorsed by this school

Course

4111

Subject

Finance

Date

Jun 27, 2024

Type

pdf

Pages

18

Uploaded by SuperHumanElk4325

3.5 | Exercises. Problem: Short-term Financial Planning Sales Wind’n Wave Enterprises is a wholesaler of wind surfers, which currently sells one model, the Wave Rider (WR). The product is sold locally through major sports stores. The com- pany has also begun to export, which helps to smooth out seasonal fluctuations in production and sales. At present, the business has three local customers and one overseas. https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 29 of 46
Wind’n Wave 2018 Sales Forecast (Units) Q1 Q2 Q3 Q4 Year Local Customer 1 43 76 58 27 204 Customer 2 56 122 87 22 287 Customer 3 33 66 48 17 164 Sub-total 132 264 193 66 655 Export 77 114 115 77 383 Total 209 378 308 143 1,038 Expected prices for 2018 for Wave Rider are: Price (CAD Per Unit) Local Export Wave Rider (WR) 900 675 Twenty percent of sales are for cash. Of the credit sales, ap- proximately 70.0% are paid for in the quarter the sale takes place and the balance are collected in the following quarter with negligible bad debts. Sales in the first quarter of 2019 are expected to be 250 units, which is 20.0% higher than the first quarter of 2018. https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 30 of 46
Cost of Goods Sold Wind’n Wave gets its product from a system of small indepen- dent contractors. In the coming year, the company expects to be able to buy Wave Riders for CAD 525. Seventy percent of all merchandise purchased is paid for in that quarter. The remainder is paid for in the following quar- ter. Company policy is to maintain merchandise inventory in units equal to 30.0% of the next quarter’s estimated sales in units. This is to guard against supply interruptions, which are fre- quent given the size of its suppliers. Beginning inventory on January 1, 2018 consists of 63 units. Operating Expenses Wind’n Waves financial manager has put together the follow- ing information on estimated operating expenses for 2018 : https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 31 of 46
Category Details Selling Fixed component of CAD 35,500 a year plus a variable component equal to 1.0% of sales revenue for sales commissions. Distribution All variable equal to CAD 7 per unit for local sales and CAD 15 per unit for exports. Administrative All fixed equal to CAD 45,200 a year including CAD 7,000 for depreciation of fixed assets and CAD 18,000 in rent. All fixed costs are incurred uniformly throughout the year and are paid for as incurred. Capital Budget Wind’n Wave’s financial manager has reviewed an updated list of capital expenditures in 2018 and has selected the following projects: Item Estimated Cost When New computer with associated software for bookkeeping, scheduling, and word processing – 5-year life CAD 26,000 End Q1 New office equipment – 10-year life CAD 19,500 End Q2 https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 32 of 46
Depreciation charges for these assets were not included in the administration budget. Financing Wind’n Wave has an 8.0% line of credit, which allows it to borrow up to CAD 40,000 to finance its accounts receivable and inventories. The bank allows Wind’n Wave to borrow up to 50.0% of the value of their good accounts receivable but nothing against their finished goods inventory due to its highly specialize nature. Interest is paid quarterly and any borrowing or paying down of the loan is be done at the end of each quarter. The line of credit must be paid down to zero once per year. The company’s purchases of capital assets can be financed with a term loan. Interest is paid quarterly at a rate of 10.0%. The principal is paid down on a straight-line basis over the life of the asset. Payments are made quarterly. Up to 80.0% of the asset’s value can be borrowed. Company policy is to try to maintain a cash balance of CAD 20,000 at all times to guard against unexpected cash out- flows. This approximates 10.0% of quarterly cash disburse- ments. Surplus cash can be invested in 3-month term de- posits earning 5.0%. Interest is paid quarterly. Quarterly and annual financial statements must be submitted https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 33 of 46
to the bank. In addition to the required coverage ratio, the bank requires that a current ratio of at least 1.5X be main- tained on a quarterly basis. Also, an annual cash flow cover- age ratio of at least 2.0 must be maintained. The goal for the long-term debt to total capitalization ratio is 40.0%. Company policy is to match the maturity of its assets and financing if possible. Dividends Regular dividends of CAD 15,000 are to be paid out each quar- ter unless a serious cash shortage prevents it. Special divi- dends can be paid if the company’s cash balance becomes ex- cessive. Income Taxes The corporate tax rate is 45.0%. Taxes are paid at the end of each quarter. Balance Sheet https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 34 of 46
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help