Rework Problem 1 assuming minimum cash on hand requirements are $10,000 a month

Question

Rework Problem 1 assuming minimum cash on hand requirements are $10,000 a month through May, increase to $15,000 in June and July, increase further to $20,000 in August and September, and return to the $10,000 per month level beginning in October.

Determine whether Itsar Products will have a cash need during the next year.

If Itsar Products has a cash need, indicate the month when the need will begin and determine the month and amount when the maximum need will occur.

Determine whether the cash need (if any) can be repaid within the next year.

Short-Term Financial Planning] Artero Corporation is a traditional toy products retailer that recently also started an Internet-based subsidiary that sells toys online. A markup is added on goods the company purchases from manufacturers for resale. Swen Artero, the company president, is preparing for a meeting with Jennifer Brown, a loan officer with First Banco Corporation, to review year end financing requirements. After discussions with the company’s marketing manager Rolf Eriksson and finance manager Lisa Erdinger, sales over

All sales are made on credit terms of net 30 days and are collected the following month and no bad debts are anticipated. The accounts receivable on the balance sheet at the end of September thus will be collected in October. The October sales will be collected in November, and so on. Inventory on hand represents a minimum operating level (or “safety” stock), which the company intends to maintain. Cost of goods sold average 80 percent of sales. Inventory is purchased in the month of sale and paid for in cash. Other cash expenses average 7 percent of sales. Depreciation is $10,000 per month. Assume taxes are paid monthly and the effective income tax rate is 40 percent for planning purposes.

      The annual interest rate on outstanding long=term debt and bank loans (notes payable) is 12%. There are no capital expenditures planned during the period, and no dividends will be paid. The company’s desired end-of-month cash balance is $80,000. The president hopes to meet any cash shortages during the period by increasing the firm’s notes payable to the bank. The interest rate on new loans will be 12%.

A.Prepare monthly pro forma income statements for October, November, and December, and for the quarter ending December 31, 2014.

B.Prepare both a monthly cash budget and pro forma statements of cash flows for the October, November, and December 2014.

C.Describe your findings and indicate the maximum amount of bank borrowing that is needed.

4.     [Cash Conversion Cycle] Two years of financial statement data for the Munich Export Corporation are shown below.

a.     Calculate the inventory-to-sale, sale-to-cash, and purchase-to-payment conversion periods for Munich Exports for 2013.

b.     Calculate the length of Munich Exports’ cash conversion cycle for 2013.

Monthly Net inflow need from increase in min- beg min cash - cumulative cash Cash Disburse- Min cash need end min cashamount Month January February March April Cash Receipts ments June July August September October November December $100,000 $90,000 $80,000 $100,000 $120,000 $160,000 $200,000 $250,000 $250,000 $200,000 $140,000 $100,000 $100,000 $10,000 $110,000 $10,000 $110,000 $10,000 $150,000 $10,000 $180,000 $10,000 $180,000 $15,000 $180,000 $15,000 $180,000 $10,000 $150,000 $10,000 $110,000 $10,000 $100,000 $10,000 $100,000 $10,000

Explanation / Answer

per the rules, I can do one qustion only.

Average inventory = (450,000+570,000)/2 = 510,000

Sales revenue = 1,600,000

Inventory to sales ratio = average inventory/ sales revenue

                                                = 510,000/1,600, 000

                                                = 31.875%

Average AR = (200,000+300,000)/2

                       = 250,000

Days inventory outstanding = Avg inventory x365/ COGS

                                              DIO= 510,000 x365/960,000

                                                       = 193.91 days

Days sales outstanding = average AR x365/ Sales revenue

                                DSO = 250,000 x365 / 1600,000

                                                =57.031

Average AP = (130,000+180,000)/2

                       = 155,000

Days payable outstanding = Average AP x 365/ cost of goods sold

                                                DPO =155,000 x365 / 960,000

                                                    = 58.93

Cash conversion period = DIO +DSO –DPO

                                                = 193.91+57.03-58.93

                                                = 192.01

Sales to cash conversion period = Sales revenue / Cash conversion period

                                                                = 1,600,000/ 192.01

                                                                =8,332.90

Cash conversion cycle = 192.01 days

                  

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