BUSI320

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320

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Finance

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Apr 3, 2024

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Week 2 – read and interact 1 Financial planning is essential to the strategic growth of the firm The most comprehensive means of financial forecasting is to develop a series of projected, or pro forma, financial statements. The pro forma income statement provides a projection of how much profit the firm anticipates making over the ensuing time period. While constructing pro forma income statement the main consideration is the cost associated with units sold. In preparation of the pro forma income statement, which of the following items are deducted from gross profits to arrive at earnings after taxes? Tax expense, interest expense, general administrative expense Managers should plan ahead of events A firm sells 500,000 widgets at $40 each, the cost of the widgets is $25 each, expected general and administrative expenses are 20% of sales, the firm has $2,000,000 of debt at a rate of 5%, and taxes are 35%. Calculate the firm's earnings after taxes? Sales = # of units x price sold Subtract cost =number of units times cost per unit Subtract 20% of sales price Subtract % rate of debt Multiply that number by (1-.35 tax rate) = answer A company should be able to estimate which of the following on the basis of its projected financial statements? Payables, inventory, accounts receivable The process of dividing the pro forma income statement into smaller time frames is done to anticipate the seasonal and monthly patterns of which of the following? Cash in flows and out flows The importance of the pro forma income statement is to provide a projection of how much profit is anticipated over the ensuing time period. A firm anticipates cash receipts for February of $20,000 and for March of $30,000. Cash payments are expected to be $5,000 in February and $7,000 in March. The cash balance at the beginning of February was $6,000, which

is the level the firm wishes to maintain. At the beginning of February, the firm has a $21,000 loan balance on a line of credit with a local bank. Based on the cash budget, how much can the firm repay in February and March? A firm anticipates cash receipts for February of $20,000 and for March of $30,000. Cash payments are expected to be $5,000 in February and $7,000 in March. The cash balance at the beginning of February was $6,000, which is the level the firm wishes to maintain. At the beginning of February, the firm has a $21,000 loan balance on a line of credit with a local bank. Based on the cash budget, how much can the firm repay in February and March? $15,000 & $6,000, respectively, with a $23,000 cash balance at the end of March. correct Reason: FEBRUARY $15K (Feb Net CF) + $6K (Beg Cash Bal) = $21K (Cum Cash Bal - $6K End Cash Bal = $15K Feb Repayment MARCH $23K (Mar Net CF) + $6K (Beg Cash Bal) = $29K (Cum Cash Bal - $6K Feb Repayment = $23K Mar End Cash Balance. The largest expense associated with a merchandising firm is its cost of goods sold. A company has sales of $1,000,000, cost of goods sold at 60% of sales, general and administrative expenses of $250,000, interest expenses of $25,000, and a tax rate of 40%. The firm's earnings after taxes is 75000 Field 1 Field 1 75000 , Correct Unavailable $75,000 Sales - Sales x cog % Subtract gen admin exp Subtract interest Take that number x (1-.4 tax rate) = answer A firm's operating profit is $50,000, interest expense is $4,000, the tax rate is 35%, and common stock dividends are $2,500. Calculate the firm's earnings after taxes: Take profit – interst expense Take that number x (1-interst rate) Ignore stock dividends

A company has forecasted sales of $50,000 in January, $40,000 in February, and $60,000 in March. All sales are on credit with 50% collected in the month of the sale, 30% collected in the month following the sale, and the remaining amount collected in the second month after the sale. After collections are made in the month of March, what will the accounts receivable balance be? $38,000 correct Reason: A/R at the end of March (i.e., credit not yet collected) will be 30% + 20% of Mar ($60K X .5 = $30K) + 20% of Feb ($40K X 0.2 = $8K) = $38,000 The generation of sales and profits does not ensures adequate cash on hand to meet financial obligations The primary considerations for cash payments are monthly costs associated with interst payments and taxes, general administrative expenses, inventory manufactured during the period While constructing pro forma income statement the main consideration is the cost associated with units sold. Net cash flow is the difference between total cash receipts and total cash payments In preparation of the pro forma income statement, which of the following items are deducted from gross profits to arrive at earnings after taxes? Interest expense, general administrative expense The firm has projected sales of $30,000 in June, $25,000 in July, and $20,000 in August. 20% of sales are collected in the month of the sale and 80% are collected in the month following the sale. What are cash receipts in August? $24,000 Take 20% of august and 80% of February Holding cash for emergency purposes is a precautionary motive It is crucial that a firm ensure that adequate cash is available to meet maturing obligations. Cash payments may be necessary for manufacturing overhead, general expenses, issuing a cash dividend, but not depreciation expenses The pro forma balance sheet is developed by integrating the information from the pro forma income statement and cash budget

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A firm that does not wish to borrow to meet anticipated sales growth may instead decide to issue preferred stock, issue additional common stock A company has sales of $1,000,000, cost of goods sold at 60% of sales, general and administrative expenses of $250,000, interest expenses of $25,000, and a tax rate of 40%. The firm's earnings after taxes is To calculate the cash balance before financing on the cash budget, add the beginning cash balance to the budgeted cash receipts and deduct cash payments Pro forma balance sheet is a projection of future assets, liabilities and stockholder equity levels Sales growth can be financed through which of the following? Use of notes payable, sale of common stock, issuance of long-term debt (you would not purchase common stock) In preparation of the pro forma income statement, which of the following items are deducted from gross profits to arrive at earnings after taxes? General admin exp, interest expense, tax expense (not cost of goods as that is deducted from sales to get profit The pro forma balance sheet is developed by integrating the information from the pro forma income statement and cash budget

Week 2 – Read & Interact Leverage looks at how long terms debt is used to finance the business A firm must first determine the amount of which types of costs to be used in the production process. Fixed costs Operating Leverage reflects the extent to which fixed assets and associated fixed costs are utilized in the business Break even analysis can be used to determine how much changes in volume affect costs and profits Firms that take a conservative approach to the use of operating leverage may increase variable costs in lieu of adding fixed costs Financial leverage may increase a company’s return on equity The production process requires that management determine the amount of labor and plant & equipment will be used Which factor(s) influence management's decision to follow a more aggressive approach to the firm's leverage or a more conservative approach? Growth of the business Firm’s competitive position Economic conditions Managements own risk taking desires Operating leverage is defined as the extent to which fixed assets and associated fixed costs are used in the business In accounting and finance, depreciation represents a(n) non-cash outlay Break-even analysis is used to answer which of the following question(s)? how much will changes in volume affect profit Firms with a lower degree of operating leverage will have a small loss potential and small profit potential DOL = Percent change in operating income / percent change in unit volume When management expects an economic downturn it may be in the firms best interest to undertake a conservative plan Financial leverage is defined as the amount of debt used in the capital structure of the firm

Depreciation is an accounting flow that represents a noncash accounting entry A company employing heavy financial leverage has a cost to borrow of 8% and return on assets of 10%. As EBIT increases the firm will greatly expand its earnings per share A company producing and selling 70,000 units has a DOL of 1.5, which indicates that at 70,000 units a 1.5% increase in sales volume will produce a 1% change in operating income Firms that expand the use of debt in their capital structure run the risk of being perceived by lenders as a greater financial risk, paying higher interest rates Using EBIT instead of Net Income, in the return on assets ratio nulls the effects of the different capital structures and tax rates used by different companies. With this in mind, if company A has an EBIT of $15,000 and total assets of $199,000 what is the company earning on its assets? Give your answer in percent to two decimal places. ROA: = EBIT/TA = $15K/$199K = 7.54%

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