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Prepared by: Joniel Maducdoc Subject: Financial Management 1 Professor: Mr.

Trinidad Topic: Financial Planning Proble # 6 Given the information that follows, prepare a cash budget for the Central City Department Store for the first six months of 20x2 under the following assumptions: a. All prices and costs remain constant b. Sales are 75% for credit and 25% for cash c. In terms of credit sales, 60% are collected in the month after the sales, 30% in the 2nd month, and 10% in the 3rd. Bad debt losses are insignificant d. Sales, actual and estimated, are october 20x1 November 20x1 December 20x1 January 20x2 February 20x2 $ 300,000 350,000 400,000 150,000 200,000 March 20x2 April 20x2 Ap May 20x2 June 20x2 July 20x2 $ 200,000 300,000 250,000 200,000 300,000

e. Payments for purchases of merchandise are 80% of the following month's anticipated sales f. Wages and salaries are January February $ 30,000 40,000 March April $ 50,000 50,000 May June $ 40,000 35,000

g. Rent is $ 2,000 a month h. Interest of $ 7,500 is due at the end ofeach calendar quarter i. A tax prepayment on 20x2income of $50,000 is due in April j. A capital investment of $ 30,000 is planned in June k. The company has a cash blance of $ 100,000 at December 31, 20x1, which is the minimum desired level for cash. Funds can be borrowed in multiples of $5,000 on a monthly basis. (Ignore interest on such borrowings)

JSM page 2 Soln: Schedule of sales receipt Oct 300000 225000 Nov 350000 262500 135000 Dec 400000 300000 157500 67500 Jan 150000 112500 180000 78750 22500 0 135000 225000 281250 37500 318750 Feb 200000 150000 67500 90000 26250 183750 50000 233750 Mar 200000 150000 90000 33750 30000 153750 50000 203750 Apr 300000 225000 90000 45000 11250 146250 75000 221250 20000 318750 233750 203750 241250 257500 245000 243750 May 250000 187500 135000 45000 15000 195000 62500 257500 Jun 200000 150000 112500 67500 15000 195000 50000 245000 Jul 300000 225000 90000 56250 22500 168750 75000 243750

Tot Sales credit sales @75% Collection,1st mo @60% collection, 2nd mo @30% collection, 3rd mo @10% Total collection Cash sales Total sales receipt Proceeds of loan Total cash receipts Schedule of disbursement

Oct purchase (80% of the ff month's sales) wages other expenses CAPEX dividend payments Income taxes Total cash disbursement

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

280000

320000

120000

160000 30000 2000

160000 240000 40000 50000 2000 9500

200000 50000 2000

160000 40000 2000

240000 35000 9500 30000

2000

2000

2000

2000

50000 192000 202000 299500 302000 202000 314500

Net Cash flow and Cash balance Total cash receipt Total cash disbursement Net cash flow Beginning cash w/o financing Jan Feb Mar 318750 233750 203750 192000 202000 299500 126750 31750 -95750 100000 226750 258500 Apr May Jun 241250 257500 245000 302000 202000 314500 -60750 55500 -69500 162750 102000 157500

Ending cash w/o financing

226750

258500

162750 102000

157500

88000

JSM page3 Chapter 15: Credit Policies Prob #1: To increase sales from their present annual $24 mil, Jefferson Knu Monroe Co., a wholesaler, may try more liberal credit standards. Currently, the firm has an average collection period of 30 days. It believes that with increasing liberal credit standards, the ff will result: Credit Policy Increase in sales from previous level (millions) Average collection period for incremental sales (dsys) A B C D

$2.80

1.8

1.2

0.6

45

60

90

144

the price of the products average $20 per unit, and variable costs average $18 per unit. No bad debt losses are expected. If the company has a pretax opportunoty cost of funds of 30%, which credit policy should be pursued?(assume 360 day year) Soln: Present: # of units sold @ $20/unit variable cost = $18 A Increase in sales from previous level (millions) Average collection period Turn over ratio Profitability of addt'l sales (CM*# units sold) Additional receivables (addtl sale/TOR) Investment in addtl receivables (var cost/price)(addtl receivables) Required return on addtl invstmnt 2.8 45 8 280000 350000 315000 B 1.8 60 6 180000 300000 270000 C 1.2 90 4 120000 300000 270000 D 0.6 144 2.5 60000 240000 216000

0.9

94500 81000 81000 64800 185500 99000 39000 -4800 Therefore it is advisable to choose Policy A because amongts the four policy Policy A has the greatest returns. prob # 2 Upon reflection, Jefferson Knu Monroe has estimated that the following pattern of bad debt losses will prevail if it initiates more liberal credit terms: Credit policy A B C D

bad-debt losses on incremental sales Which policy now is best? JSM page 4 Soln: In millions Credit Policy Increase in sales from previous level (millions) Average collection period for incremental sales (dsys) bad-debt losses on incremental sales Turn over Ratio Profitability of addtl sales (30%) ,(mil.) Additional bad-debt losses (mil) (addtl sales*bad-debt %) Additional receivables (mil) (addtnl sales/TOR) Investment in addtl receivables Required return on addtl investment(30%) Bad-debt losses + addtl required return Incremental profitabilitty (profitability of addl sales minus bad-debt losses plus required return)

3.00%

6%

10%

15.00%

$2.80

1.8

1.2

0.6

45 3.00% 8 $0.840 $0.084 $0.350 $0.315 $0.095 $0.179 $0.662

60 6% 6 $0.540 $0.108 $0.300 $0.270 $0.081 $0.189 $0.351

90 10% 4 $0.360 $0.120 $0.300 $0.270 $0.081 $0.201 $0.159

144 15.00% 2.5 $0.180 $0.090 $0.240 $0.216 $0.065 $0.155 $0.025

Considering marginal revenue, Policy A is a good option to regain additonal sales.

Submitted by: Joniel Maducdoc Beverly Castro Marjiel Reballos

Date: Apr 04, 2011 Subject: Financial Management Topic: Inventory Management Professor: Mr. Trinidad

Proble# 10 Favorite Foods, Inc., buys 50,000 of boxes of ice cream cones every 2 months to service steady demand for the product. Order costs are $100 per order, and carrying costs are $0.40 per box. a. Determine the optimal order quantity b. The vendor now offers Favorite Foods a quantity discount of $ .02 per box if it buys cones in order sizes of 10,000 boxes. Should Favorite Foods avail itself of the quantity dicsouunt? (Hint: Determine the increase in carrying cost and decrease in ordering cost relative to your answer in part a. Compare these with the total savings available through the quantity discount.) A.

EOQ

2 AO C

A= 50,000 every 2 months O= $100 C= $.4 Use direct substitution: EOQ= 5000 units B. Assume $1 cost per cone Order Size Average Annual Inventory Reqt (units) 5,000 10,000 2,500 5,000 300,000 300,000

No. of orders
(3 divided 1)

Cost of purchase (3) X (5) 300,000 294,000

Carrying cost
at . $.4 per

Ordering Cost
at $100

Total Cost
(6+ 7 + 8)

unit 1,000 2,000

per order 6,000 3,000 307,000 299,000

60 30

Since availing of the discount would mean lesser cost, it is practical to grab the offfer

Grp#4

Simplified Solution: Order Size Total # of Total orders, Ordering quantity Cost, $ (1) 5,000 10,000 (2) (3) 50000/(1) (2)*100 10 1,000 5 500
Total Carrying cost, $

Total Cost Discount, Final Cost, $ per order, $ $

(4) (5) Ave inv*.4 (3)+(4) 1000 2,000 2000 2,500

(6) 0 1,000

(7) (5)-(6) 2,000 1,500

Therefore, FFI can avail the quantity discount due to savings it can bring to their company.

Prob#11 Fouchee Scents, Inc., makes various scents for use in the manufacture of food products. Although the company does maintain a safety stock, it has a policy of " lean" inventories, with the result that customers sometimes must be turned away. In an analysis of the situation, the company has estimated the cost of being out of stock associated with various levels of stock out:

Safety Stock Level Present New level 1 New level 2 New level 3 New level 4 New level 5

Level of Safety Stock (gal) 5000 7500 10000 12500 15000 17500

Annual Cost of stockouts, $ 26000 14000 7000 3000 1000 0

Carrying costs are $5.65 per gal per year. What is the best level of safety stock for the company? Get Total Carrying cost per level

Grp#4 Safety Stock Level (1) Present New level 1 New level 2 New level 3 New level 4 New level 5 Level of Safety Stock (gal) (2) 5000 7500 10000 12500 15000 17500 Annual Cost of stockouts, $ % Satisfied (3) _(4) $26,000.00 $14,000.00 $7,000.00 $3,000.00 $1,000.00 $0.00 0.00% 46.15% 73.08% 88.46% 96.15% 100.00%

Carrying Cost, $ (5) $28,250.00 $42,375.00 $56,500.00 $70,625.00 $84,750.00 $98,875.00

Total lost, $ (3)+(5) $54,250.00 $56,375.00 $63,500.00 $73,625.00 $85,750.00 $98,875.00

% inc on cost (6) 0.00% 3.92% 17.05% 35.71% 58.06% 82.26%

From the data, we can see that at almost 4% increaae on total lost, we can gain more than 45% of losses due to stock out, thus level 1 is a the preferred choice. Soln if the carrying cost is $0.65 only Level of Safety Stock (gal) (2) 5000 7500 10000 12500 15000 17500

Safety Stock Level (1) Present New level 1 New level 2 New level 3 New level 4 New level 5

Annual Cost of stockouts, $ (3) $26,000.00 $14,000.00 $7,000.00 $3,000.00 $1,000.00 $0.00

Carrying Cost, $ (5) $3,250.00 $4,875.00 $6,500.00 $8,125.00 $9,750.00 $11,375.00

Total lost, $ (3)+(5) $29,250.00 $18,875.00 $13,500.00 $11,125.00 $10,750.00 $11,375.00

Using the new carrying cost, it appears that New level 4 is the best choice because it has the lowest total cost

Prepared by: Joniel Maducdoc Topic: Liquididty and Working Capital Mnagement Date : 04/11/2011 Prob # 1

Submitted to: Mr.Trinindad

Speedway owl Co., franchises Gas and Go stations in North Carolina and Virginia. All payments by franchisees for gasoline and oil products are by check, which average in total $420,000 a day. At present, the overall time between a check being mailed by the franchisee to Speedway Owl and the company having available funds at its bank is 6 days. a. How much money is tied up In this interval of time? 420000 X 6 = 2520000

b. To reduce this delay, the company is considering daily pick-ups from the station. In all, two cars would be needed and two additional people hired. The cost would be $93,000 annually. This procedure would reduce the overall delays by 2 days. Currently, the opportunity cost of funds is 9 percent, that being the interest rate on marketable securities. Should the company inaugurate the pick-up plan? Opprtunity cost= .09*420000 (420000*2)-93000-opportunity cost Therefore, they shoud avail the offer

709200 savings

c. Rather than mail checks to its bank, the company could deliver them by messenger service. This procedure would reduce the overall delay by 1 day ansd cost $10,300 annually. Should the company undertake this plan? 420000*1 = 420000 savings=420000-10300 = No. savings is lesser than average collection

409700

prob#2 Topple Tea houses, Inc., operates seven restaurants in the state of Pennsylvania. The manager of each restaurants transfers funds daily from the local bank to the company's principal bank in harrisburg. There arew approximately 250 bussiness days during a year in which transfers occur. Several methods of transfer are available. A wire transfer results in immediate availability of funds, buut the local banks charge $5 per wire transfer. A transfer through an automatic clearing house involves next day settlement, or a 1 day delay, and cost $3 per transfer. Finally, a mail-based depository transfer check arrangement cost $.3 per transfer, and mailing times result in a 3-day delay on average for the transfer to occur. ( This experience is the same for each res taurant.) The company presently uses depository transfer checks for all transfers. The restaurants have the following daily average remittances:

Restaurant Remittance

1 $3,000

2 4600

3 2700

4 5200

5 4100

6 3500

7 3800

a. If the opportunity cost of funds is 10%, which transfer procedure should be used for each restaurants? b. If the opprtunity cost of funds were 5%, what would be the optimal strategy? Soln to A. using depository transfer check (procedure1)
(1) Restaurant (2) Remittance (3) Opportunity cost (4) Transfer cost 250*.3 (5) Nos. of delays (6) Opportunity Cost (2)*(5)*(3) (7) total cost (4)+(6)

1 2 3 4 5 6 7

$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800

0.1 0.1 0.1 0.1 0.1 0.1 0.1

$75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0

3 3 3 3 3 3 3

$900 $1,380 $810 $1,560 $1,230 $1,050 $1,140

$975.0 $1,455.0 $885.0 $1,635.0 $1,305.0 $1,125.0 $1,215.0

Using wire transfer (procedure 2)


(3) Opportunity cost (6) Opportunity Cost (2)*(5)*(3)

(1) Restaurant (2) Remittance

(4) Transfer cost 250*5

(5) Nos. of delays

(7) total cost (4)+(6)

1 2 3 4 5 6 7

$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800

0.1 0.1 0.1 0.1 0.1 0.1 0.1

$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0

0 0 0 0 0 0 0

$0 $0 $0 $0 $0 $0 $0

$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0

Using automatic clearing house (procedure 3)


(3) Opportunity cost (6) Opportunity Cost (2)*(5)*(3)

(1) Restaurant (2) Remittance

(4) Transfer cost 250*3

(5) Nos. of delays

(7) total cost (4)+(6)

1 2 3 4 5 6 7

$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800

0.1 0.1 0.1 0.1 0.1 0.1 0.1

$750.0 $750.0 $750.0 $750.0 $750.0 $750.0 $750.0

1 1 1 1 1 1 1

$300 $460 $270 $520 $410 $350 $380

$1,050.0 $1,210.0 $1,020.0 $1,270.0 $1,160.0 $1,100.0 $1,130.0

Therefore best procedure for the restaurants are as follows: Restaurant 1 2 3

Procedure Using 5% opportunity cost


(3) Opportunity cost

(1) Restaurant (2) Remittance

(4) Transfer cost 250*.3

(5) Nos. of delays

(6) Opportunity Cost (2)*(5)*(3)

(7) total cost (4)+(6)

1 2 3 4 5 6 7

$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800

0.05 0.05 0.05 0.05 0.05 0.05 0.05

$75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0

3 3 3 3 3 3 3

$450 $690 $405 $780 $615 $525 $570

$525.0 $765.0 $480.0 $855.0 $690.0 $600.0 $645.0

Using wire transfer (procedure 2)


(3) Opportunity cost (6) Opportunity Cost (2)*(5)*(3)

(1) Restaurant (2) Remittance

(4) Transfer cost 250*5

(5) Nos. of delays

(7) total cost (4)+(6)

1 2 3 4 5 6 7

$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800

0.05 0.05 0.05 0.05 0.05 0.05 0.05

$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0

0 0 0 0 0 0 0

$0 $0 $0 $0 $0 $0 $0

$1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0 $1,250.0

Using automatic clearing house (procedure 3)


(3) Opportunity cost (6) Opportunity Cost (2)*(5)*(3)

(1) Restaurant (2) Remittance

(4) Transfer cost 250*3

(5) Nos. of delays

(7) total cost (4)+(6)

1 2 3 4 5 6 7

$3,000 $4,600 $2,700 $5,200 $4,100 $3,500 $3,800

0.05 0.05 0.05 0.05 0.05 0.05 0.05

$750.0 $750.0 $750.0 $750.0 $750.0 $750.0 $750.0

1 1 1 1 1 1 1

$150 $230 $135 $260 $205 $175 $190

$900.0 $980.0 $885.0 $1,010.0 $955.0 $925.0 $940.0

Therefore best procedure for the restaurants are as follows: Restaurant 1 2 3 Procedure 1 1 1

4 1

5 1

6 1

7 1

prob#3 (PV,ROI,ROR,IRR,NPV)

The following are exrecises in present values. a. $100 at the end of 3 years is worth how much today, assuming a discount rate of (1) 10%? (2) 100%? (3) 0%? b. What is the aggregate present value of $ 500 received at the end of each of the next 3 years, assuming a discount rate of (1) 4%? (2)25%? c. $100 is received at the end of 1 year, $500 at the end of 2 years, and $1000 at the end of 3 years. What is the aggregarte present value of these receipts, assuming a discount rate of (1) 4%? (2) 25%? d. $1,000 is to be received at the end of 1 year, $500 at the end of 2 years, and $100 at the end of 3 years. What is the aggregate present value of these receipts, assuming a discount rate of (1) 4% (2)25%? e. Compare solutions in part c with those in part d and explain the reason for differences. Soln a. b.

PV= A/(1+k)rt3 PV= A/(1+k)rt3

at 10% = at 100% = at 4% = at 25% =

75.13148 12.5 444.4982 256 = = = =

at 0%=

100

c.@4% @25% d.@4% @25% e.

PV = 100/1.04 + 500/(1.04)rt2 + 1000/(1.04)rt3 PV = 100/1.25 + 500/(1.25)rt2 + 1000/(1.25)rt3 PV = 1000/1.04 + 500/(1.04)rt2 + 100/(1.04)rt3 PV = 1000/1.25 + 500/(1.25)rt2 + 100/(1.25)rt3

1447.428 976.6154 1512.716 1235.815

Difference between the last exercises happened due to difference of initial amount

Prb#4 The following are exercises on internal rates of return a. An investment of $1000 today will return $2000 at the end of 10 years. What is the IRR 1000=2000/(1+r)10 r= (2)(1/10)-1 0.07718 or 7.72%

b. An investment of $1000 today will return $500 at the end of each of the next 3 years. What is the IRR? disc rate disc factor csh flo pv of stream 23 2.0114 500 1005.7 24 1.9814 500 990.7 using 23%=2.0114 use interpolation: 5.7/15=.38=23+.38 23.38

c. An investment of $1000 today will return $ 1000 at the end of 1 year, $500 at the end of 2 yrs, and $100 at the end of 3 yrs. What is its IRR/ same as b. assume 2 dis rate 40 and 41% 40.616% ans

d. An investment of $1000 will return $60 per yr forever. What is its IRR? 60/1000=6%

Prepared by: Joniel Maducdoc Grp 4 Topic: Short/Medium Term Financing Secured loan Arrangement Prob#1

Date: April 18, 2011 Professor: Mr. Trinidad

The Bone Com., has been factoring its accounts receivables for the past 5 yrs. The factor charges a fee of 2% and will lend up to 80% of the volume of receivables purchased for an additonal 1.5% per month. The firm typically has sales of $500,000 per month, 70% of which are on credit. By using the factor, two savings are effected: a. $2,000 per month that would be required to support a credit department b. A bad-debt expense of 1% on credit sales The firm's bank has recently offered to lend the firm up to 80% of the face value of the receivables shown on the schedule of accounts. The bank would charge 15% per annum interest plus a 2% monthly processing charge per dollar of recevables lending. The firm extends terms of net 30, and all customers who pay their bills do so in 30 days. Should the firm discontinue its factoring arrangement in favor of the banks's offer if the firm borrows,on the average, $100,000 per month on its receivables? Soln: Factoring cost = factoring fee + interest charge if the firm draws on its account before the receivables are collected Total receivables = (500000*.7) = 350000 Factoring fee = .02*total receivabes = 7000 Lending fee = .015 * (100000) = 1250 total factoring fee= 8250 bank financing Total receivables= =500000*.7 350000 Bank charge= 15% per annum = Processing fee=.02*100000 = Addtnl cost=2000+1%bad debt = total bank finance cost =

9800

1250 2000 5500 8750

based on the cost analysis, the company should continue their engagement with the factor