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

Report
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
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
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
Wind’n Wave Balance Sheet December 31, 2017 Current assets Cash CAD 21,483 Accounts receivable 26,700 Inventory 32,918 Total current assets CAD 81,101 Fixed assets Equipment 91,788 Total assets CAD 172,889 Current liabilities Line of credit Accounts payable CAD 27,563 Current portion of long-term debt 10,000 Total current liabilities CAD 37,563 Long-term liabilities Term loan 50,000 Shareholders’ equity Share capital 53,000 Retained earnings 32,326 Total liabilities and equity CAD 172,889 https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 35 of 46
REQUIRED: 1. Prepare budgeted income statements, cash flow state- ments, balance sheets, and key financial ratios for Q1 2018. 2. Why did the company experience a cash shortage in Q1? 3. What actions could be taken to increase cash flows in Q1? 4. What actions could be taken to increase the current ratio in Q1? 5. What actions could be taken to reduce the long-term debt to total capitalization ratio in Q1? 6. How was the CAD 35,000 limit on the line of credit de- termined? 7. How was the desired cash level of CAD 20,000 deter- mined? 8. Prepare pro forma financial statements and key finan- cial ratios for Q2, Q3, and Q4 2018. 9. Analyze the financial decisions made in Q1, Q2, Q3, and Q4 2018 focusing on the interrelationships between each of the quarters. Problem: Percen t age of Sales Method https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 36 of 46
The following are the financial statements of Quick Silver Ltd. for the previous year. 2013 Net sales CAD 4,377,432 Expenses Cost of sales CAD 3,185,784 Marketing and sales 496,786 Administration and research 285,475 Interest 34,563 Depreciation 126,777 Earnings before taxes CAD 248,047 Income taxes 74,414 Net income CAD 173,633 https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 37 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
2013 Current assets Cash CAD 34,756 Temporary investments 305,815 Accounts receivables 550,345 Inventories 394,356 Prepaid expenses 30,345 Total current assets CAD 1,315,617 Property, plant, equipment 1,320,334 Other assets 257,654 Total assets CAD 2,893,605 Current liabilities Accounts payable 532,902 Accrued payroll payables 243,826 Income taxes payable 6,201 Total current liabilities CAD 782,929 Long-term liabilities 597,853 Shareholders’ equity 1,512,824 Total liabilities and equity CAD 2,893,605 Quick Silver estimates that sales will increase by 5.0% over each of the next three years. The company has a target long- term debt to total capitalization ratio of 30.0% which is 10.0% below the industry average. Quicksilver founder and CEO https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 38 of 46
had difficulties with excessive debt early on in the company’s life and has compensated by borrowing less. Dividends are currently CAD 80,000 per year and company policy is to in- crease dividends only if they can be maintained. The compa- ny also refuses to lower dividends as it will cause excessive market pessimism leading to a lower share price. The is- suance of new equity is avoided for reasons of control. REQUIRED: 1. Prepare proforma income statements, cash flow state- ments, and balance sheets for the next three years. Can the company meet its goal of 5.0% growth over the next three years without reducing the regular dividend or issuing new common shares? 2. Could a 20.0% growth rate over the next three years be supported? Discuss. Problem: Adjusting Asset Requirements for Excess Capacity Meta Industries’ sales were CAD 150 million in the current year but are expected to increase by 10.0% next year. The company’s fixed assets are currently underutilized and could support sales of approximately CAD 170 million. Capacity can https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 39 of 46
be added in increments of CAD 20 million in sales at a cost of CAD 8 million. REQUIRED: 1. What is Meta’s capacity utilization? 2. How much additional fixed assets will be required next year? 3. How would the answer to Part 2 change if sales were expected to increase by 20.0% next year? Problem: Analyzing Sus t ainable Growth at Wicker Company The following are selected financial data for Wicker Company, a patio furniture manufacturer: 2011 2012 2013 2014 2015 Retention ratio 1.00 0.90 0.85 0.74 0.65 Net profit margin (%) 7.90 8.10 8.10 8.20 8.40 Asset turnover 1.34 1.22 1.17 1.14 1.07 Assets/equity 2.49 2.15 1.81 1.61 1.31 Actual growth rate (%) 5.67 8.95 10.10 9.45 8.73 REQUIRED: https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 40 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
1. Calculate the sustainable growth rate for 2011 through 2015. 2. Analyze the differences between the actual and sustain- able growth rates. Discussion Problem: Analyzing Sus t ainable Growth at Telsa Fashions The following are selected financial data for Telsa Fashions, a women’s clothing retail chain with extensive e-commerce op- erations: 2011 2012 2013 2014 2015 Retention ratio 1.00 1.00 1.00 1.00 1.00 Profit margin (%) 0.45 0.52 2.85 3.72 3.81 Asset turnover 2.24 2.41 2.48 2.51 2.53 Assets/equity 1.85 1.85 2.01 2.19 2.39 Actual growth rate (%) 8.9 10.3 18.9 28.9 29.85 REQUIRED: https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 41 of 46
1. Calculate the sustainable growth rate for 2011 through 2015. 2. Analyze the differences between the actual and sustain- able growth rates. Problem: Analyzing Sus t ainable Growth at Caribou Manu f acturing Wilma Cartlidge is the sole owner of Caribou Manufacturing in Kamloops, British Columbia. The company began opera- tions in early 2011 and has experienced rapid growth. 2011 2012 2013 2014 2015 Retention ratio 1.00 0.85 0.75 0.65 0.60 Net profit margin (%) 3.50 4.50 5.20 5.50 5.00 Asset turnover ratio 1.35 1.43 1.51 1.59 1.61 Debt ratio (%) 25.21 31.25 34.78 44.45 55.01 ROE (%) 6.32 9.36 12.04 15.74 17.89 Sustainable growth rate (%) 6.74 8.64 9.93 11.40 12.03 Actual growth rate (%) 6.32 8.45 9.79 11.43 12.25 Cartlidge is very proud of her success and her ability to man- age the company’s growth without having to raise new equity or refuse new business. Many of her colleagues told her that https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 42 of 46
periods of rapid growth were some of the most challenging for small businesses. Cartlidge is preparing to meet with her banker to discuss a new loan application for 2016. Last year, the banker showed considerable hesitation about approving any new loans but she still managed to convince him to approve her application. REQUIRED: 1. Analyze Caribou’s growth over the last five years and make recommendations for change. Problem: Analyzing Sus t ainable Growth at Beluga Manu f acturing Jurgen Vincenten owns Beluga Manufacturing Ltd. in Churchill, Manitoba, which has been in existence for five years. https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 43 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
2015 2016 2017 2018 2019 Industry Average Retention ratio 1.00 0.83 0.74 0.62 0.48 0.65 Net profit margin (%) 3.62 4.29 4.56 4.41 4.38 6.31 Asset turnover ratio 1.39 1.51 1.53 1.48 1.47 1.69 Debt ratio (%) 20.33 33.78 39.67 47.38 59.23 35.22 ROE (%) 6.32 9.78 11.56 12.40 15.79 16.46 Sustainable growth rate (%) 6.74 8.84 9.36 8.33 8.20 11.98 Actual growth rate (%) 6.70 8.73 9.32 8.43 8.32 12.01 Beluga grew over this period but had to slow its growth in recent years by refusing sales from new customers because of insufficient financing from its bank. Vincenten felt his growth rate could have exceeded the industry average if financing was available. Raising new equity capital by bringing in new owners is not an option for Vincenten as he feels he does not have the temperament to share control with anyone. Beluga’s banker requested a meeting in early January 2020 to discuss Beluga’s loans and the overall condition of the busi- ness. Last year the banker was very concerned about Beluga’s financial position, but Vincenten felt he would be satisfied this year given Beluga’s continue growth. Vincenten has just completed the construction of a new home https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 44 of 46
LICENSE Financial Management Copyright © by Dan Thompson is licensed under a Creative Commons Attribution 4.0 International License , except where otherwise noted. SHARE THIS BOOK overlooking the Hudson’s Bay in Churchill. REQUIRED: 1. Analyze Beluga’s growth over the last five years and make recommendations for change. https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 45 of 46
Powered by Pressbooks Guides and Tutorials | Pressbooks Directory Previous: Module 2: Maturity Matching Next: Module 4: Working Capital Management https://financialmanagement.pressbooks.tru.ca/chapter/module-3-financial-planning-and-growth/#chapter-88-section-6 5/31/24, 6 : 18 AM Page 46 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