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SMChap029 - Chapter 29 Financial Planning CHAPTER 29...

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Chapter 29 - Financial Planning CHAPTER 29 Financial Planning Answers to Problem Sets 1. i. Cash declines and working capital declines. ii. Cash increases and working capital is unchanged; one current asset is exchanged for another. iii. Cash declines and working capital is unchanged; a current asset is exchanged for a current liability. iv. Cash is unchanged and working capital increases. v. Cash is unchanged and working capital is unchanged; the current asset (inventory) is offset by the current liability. vi. Cash increases and working capital is unchanged; one current asset is exchanged for another. Est. Time: 01 – 05 2. a. Inventories go up (use). b. Accounts receivable go up (use). c. No change is shown on the firm’s books. d Increase in cash (source) and reduction in assets. A loss of $100,000 is deducted from retained earnings. e Cash declines (use) and equity declines. f. Cash declines (use). g. Cash is unchanged, although net working capital increases (the debt issue is a source of funds ). Est. Time: 01 – 05 3. To calculate cash inflow we multiple the credit sales collected for each of the previous three months by the proportion collected in Months 3 and 4, and add these values to the cash flows for that month: Month 3: 18 + (.5 x 90) + (.3 x 120) + (.2 x 100) = $119,000 Month 4: 14 + (.5 x 70) + (.3 x 90) + (.2 x 120) = $100,000 29-1
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Chapter 29 - Financial Planning Est. Time: 01 – 05 4. a. b. Est. Time: 06 – 10 5. a. In Table 29.2, cash = 40; total current assets = 340; bank loans = 15; current liabilities = 150; total assets = total liabilities; and net worth = 590. In Table 29.3, increase (decrease) in short-term debt = −10; net cash flow from financing activities = −35; and increase in cash balance = 20. b. In Table 29.2, long-term debt = 130; gross investment = 375; net fixed assets = 275; cash = 40; current assets = 340; total assets = total liabilities; and net worth = 615. In Table 29.3, increase (decrease) in long-term debt = 30 + 40 =70; net cash flow from financing activities = −50 + 40= −10; investment in fixed assets = − (25 + 30) = −55; and increase in cash balance = 20. c. In Table 29.1, operating cost (cost of goods sold + other expenses) = (1,644 + 411) x .9 = 1850; pretax income = 2,200 1,850 – 20 – 5 = 325; and net income = 325 x .5 = 162.5. If dividend is unchanged, earnings retained in the business = 162.5 − 30 = 132.5. 29-2
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Chapter 29 - Financial Planning In Table 29.2, assuming inventories are unchanged, cash = 25 +132.5 – 30 = 127.5; current assets = 427.5; net worth = −452.5; total assets = total liabilities, and net worth = 677.5. In Table 29.3, net income = 162.5; net cash flow from operating activities = 85 + 102.5 =187.5; and increase (decrease) in cash balance = 107.5. d. Table 29.4 changes as follows: Table 29.5 changes as follows: Q3 Q4 Collections on Accounts Receivable 818.4 826.6 Total Sources 895.4 826.6 Sources Minus Uses 268.4 189.1 Cash at Start -188.6 79.8 Change in Cash Balance 268.4 189.1 Cash at End 79.8 268.9 Cumulative Financing Required -54.8 243.9 e. Table 29.5 changes as follows: Q1 Q2 Q3 Q4 Labor and Other Expenses 116 116 116 116 Total Sources 531 539.4 767 827.8 Sources Minus Uses 121 -52.6 140 190.3 Short-Term Borrowing Requirement: Cash at Start 25 -96 -148.6 -8.6 Change on Cash Balance -121 -52.6 140 190.3 Cash at End -96 -148.6 -8.6 181.7 Cumulative Financing Required 121 173.6 33.6 -156.7 f. Table 29.5 changes as follows: Q2 Q3 Q4 29-3 Q3 Q4 Receivables at Start 181.6 105.2 Sales 742 836 Collections: Current Sales 667.8 752.4 Last Period
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