Ch 4 - A1

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2043

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Finance

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Feb 20, 2024

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Chapter 4 – Assignment 1 Problems P4-3 A. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year? Year 1: 20% x $80,000 = $16,000 B. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result? $16,000 x .34 = $5,440 P4-14 A. Construct a cash budget for the next 3 months. Month 1 Month 2 Month 3 Total cash receipts $100,000 $100,000 $100,000 Less: Total cash distributions $62,000 $62,000 + $20,000 + $10,000 $62,000 + $10,000 - $8,000 Net cash flows $40,000 $10,000 $38,000 Add: Beginning cash $0 $0 $0 Ending cash $40,000 $10,000 $38,000 Less: Minimum cash balance $0 $0 $0 Required total financing Excess cash balance $40,000 $10,000 $38,000 B. Brownstein is unsure of the sales levels, but all other figures are certain. If the most pessimistic sales figure is $80,000 per month and the most optimistic is $120,000 per month, what are the monthly minimum and maximum ending cash balances that the firm can expect for each of the 1-month periods? Month Minimum ending cash balance Maximum ending cash balance 1 $0 2 $0 3 $0 C. Briefly discuss how the financial manager can use the data in parts a and b to plan for financing needs. By carefully planning for financing needs, the financial manager can ensure the firm has the cash it needs to operate smoothly and meet its financial obligations. They can plan for borrowing money to cover any shortfalls in cash flow, investing any excess cash flow, or establish a line of credit with a bank in case of unexpected cash flow needs.

P4-16 A. Use the percent-of-sales method, the income statement for December 31, 2015, and the sales revenue estimates to develop pessimistic, most likely, and optimistic pro forma income statements for the coming year. Pessimistic Mostly Likely Optimistic Sales $900,000 $1,125,000 $1,280,000 Cost of goods sold $405,000 $506,250 $576,000 Gross Profits $495,000 $618,750 $704,000 Operating expense $225,000 $281,250 $320,000 Operating Profits $270,000 $337,500 $384,000 Interest expense $28,800 $36,000 $40,960 Net profit before taxes $241,200 $301,500 $343,040 Taxes $60,300 $73,375 $85,760 Net profit after taxes $180,900 $226,125 $257,280 B. Explain how the percent-of-sales method could result in an overstatement of profits for the pessimistic case and an understatement of profits for the most likely and optimistic cases. The fundamental percent-of-sales strategy operates under the presumption that all costs are unpredictable. There will really be some fixed costs. In the pessimistic scenario, this assumption results in the reduction of all costs when sales fall, while, only the fixed portion of costs would be lowered. Since the percent-of-sales calculation assumes that all expenditures would increase, the optimistic prediction has the opposite effect because only the variable portion will increase. This trend, in the most pessimistic scenario, results in an overestimation of profits and an overestimate of costs. In the most hopeful scenario, the opposite occurs. C. Restate the pro forma income statements prepared in part a to incorporate the following assumptions about the 2015 costs:  $250,000 of the cost of goods sold is fixed; the rest is variable.  $180,000 of the operating expenses is fixed; the rest is variable.  All the interest expense is fixed. Pessimistic Most Likely Optimistic Sales $900,000 $1,125,000 $1,280,000 Less cost of goods sold: Fixed 250,000 250,000 250,000 Variable (18.3%) a 164,700 205,875 234,240 Gross profits $485,300 $ 669,125 $ 795,760 Less operating expense Fixed 180,000 180,000 180,000 Variable (5.8%) b 52,200 65,250 74,240 Operating profits $253,100 $ 423,875 $ 541,520 Less interest expense 30,000 30,000 30,000 Net profit before taxes $223,100 $ 393,875 $ 511,520 Taxes (25%) 55,775 98,469 127,880

Net profits after taxes $167,325 $ 295,406 $ 383,640 Cost of goods sold variable percentage = ($421,875 - $250,000) / $937,500 = 18.3% Operating expense variable percentage = ($234,375 - $180,000) / $937,500 = 5.8% D. Compare your findings in part c to your findings in part a. Do your observations confirm your explanation in part b? Part (a) has higher earnings for the pessimistic situation than Part (c). In the optimistic scenario, component (a) has lesser earnings than part (c). This result backs up the findings in component (b).

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