Prepare a sensitivity analysis of trotters cash

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Unformatted text preview: $20,000 as the beginning cash balance for October and a minimum required cash balance of $18,000. b. Use the analysis prepared in part a to predict Trotter’s financing needs and investment opportunities over the months of October, November, and December. Discuss how knowledge of the timing and amounts involved can aid the planning process. LG4 3–13 Multiple cash budgets—Sensitivity analysis Brownstein, Inc., expects sales of $100,000 during each of the next 3 months. It will make monthly purchases of $60,000 during this time. Wages and salaries are $10,000 per month plus 5% of sales. Brownstein expects to make a tax payment of $20,000 in the next month and a $15,000 purchase of fixed assets in the second month and to receive $8,000 in cash from the sale of an asset in the third month. All sales and purchases are for cash. Beginning cash and the minimum cash balance are assumed to be zero. a. Construct a cash budget for the next 3 months. 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? c. Briefly discuss how the financial manager can use the data in parts a and b to plan for financing needs. LG5 3–14 Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2004 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2004. Metroline Manufacturing’s income statement for the year ended December 31, 2003, is given below, along with a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components. CHAPTER 3 Cash Flow and Financial Planning Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2003 Metroline Manufacturing Income Statement for the Year Ended December 31, 2003 Sales revenue $1,400,000 Less: Cost of goods sold Gross profits Operating profits Cost of goods sold 120,000 Fixed cost $ 370,000 Less: Interest expense 40%) Net profits after taxes Variable cost 35,000 Net profits before taxes Less: Taxes (rate 910,000 $ 490,000 Less: Operating expenses 135 $210,000 700,000 Total cost $910,000 Operating expenses Fixed expenses Variable expenses Total expenses $ 36,000 84,000 $120,000 $ 335,000 134,000 $ 201,000 Less: Cash dividends 66,000 To retained earnings $ 135,000 a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004. b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2004. c. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2004 income? Explain why. LG5 3–15 Pro forma income statement—Sensitivity analysis Allen Products, Inc., wants to do a sensitivity analysis for the coming year. The pessimistic prediction for sales is $900,000; the most likely amount of sales is $1,125,000; and the optimistic prediction is $1,280,000. Allen’s income statement for the most recent year follows. Allen Products, Inc. Income Statement for the Year Ended December 31, 2003 Sales revenue $937,500 Less: Cost of goods sold Gross profits Less: Operating expenses Operating profits 234,375 $281,250 Less: Interest expense Net profits before taxes Less: Taxes (rate 421,875 $515,625 25%) Net profits after taxes 30,000 $251,250 62,813 $188,437 a. Use the percent-of-sales method, the income statement for December 31, 2003, and the sales revenue estimates to develop pessimistic, most likely, and optimistic pro forma income statements for the coming year. 136 PART 1 Introduction to Managerial Finance 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. c. Restate the pro forma income statements prepared in part a to incorporate the following assumptions about 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 of the interest expense is fixed. d. Compare your findings in part c to your findings in part a. Do your observations confirm your explanation in part b? LG5 3–16 Pro forma balance sheet—Basic Leonard Industries wishes to prepare a pro forma balance sheet for December 31, 2004. The firm expects 2004 sales to total $3,000,000. The following information has been gathered. (1) A minimum cash balance of $50,000 is desired. (2) Marketable securities are expected to remain unchanged. (3) Accounts receivable represent 10% of sales. (4) Inventories represent 12% of sales. (5) A new machine costing $90,000 will be acquired during 2004. Total deprecia...
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This document was uploaded on 01/19/2014.

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