87 Chapter 4 PROBLEMS Planning Assumptions Example 41 page 135 1 The Lineberry

87 chapter 4 problems planning assumptions example 41

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87
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Chapter 4 PROBLEMS Planning Assumptions – Example 4.1 (page 135) 1. The Lineberry Golf Cart Co. sold 7,400 carts this year at an average unit price of $3,000. 50 days of sales remained uncollected in accounts receivable at the end of the year. The firm produced the carts at a 42% cost ratio (COGS/Revenue) and had three months of inventory on hand at year end (3/12 of the year’s COGS). The golf business is booming and management plans a 10% increase in unit sales despite a 5% price increase. The firm has programs in place to improve production efficiency, inventory management, and the effectiveness of collections efforts. It is assumed that these programs will decrease the cost ratio to 40%, lower year end inventory to 2 months, and lower year end receivables to 40 days of sales. Compute Lineberry’s revenue, COGS (cost of goods sold) and gross margin as well as ending receivables and inventory for this year and next year’s plan. Calculate using a 360 day year and assume sales are evenly distributed over the year. SOLUTION: This Year Next Year’s Plan Units 7,400 7,400 x 1.1 = 8,140 Price x $3,000 $3,000 x 1.05 = x $3,150 Units x Price = Revenue Revenue = $ 22,200,000 $25,641,000 Revenue x Cost Ratio = COGS Cost ratio x.42 x .40 COGS $9,324,000 $10,256,400 Revenue – COGS = Gross Margin Gross Margin $12,876,000 $15,384,600 (Days sales in A/R ÷ 360) x Revenue = A/R A/R (50/360) x $22,200,000 = $3,083,333 (40/360) x $25,641,000 = $2,849,000 (Months Cost in INV / 12) x COGS = Inventory COGS (3/12) x $9,324,000 = $2,331,000 (2/12) x $10,256,400 = $1,709,400 The Debt/Interest Planning Problem – Example 4.2 (page 137) 2. The Cambridge Cartage Company has partially completed its forecast of next year's financial statements as follows. FINANCIAL PLAN CAMBRIDGE CARTAGE COMPANY ($000) INCOME STATEMENT BALANCE SHEET NEXT YEAR NEXT YEAR Beginning Ending Rev $17,220 ASSETS Cost/Exp 14,120 Total Assets $12,540 $18,330 EBIT $ 3,100 LIABILITIES & EQUITY 88
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Financial Planning Interest ? Current Liabs $ 410 $ 680 EBT ? Debt $ 5,630 ? Tax ? Equity $ 6,500 ? __ EAT ? Total L&E $12,540 $18,330 The firm pays interest at 10% on all borrowings and pays a combined state and federal tax rate of 40%. Complete the forecasted income statement and balance sheet. Begin by guessing at interest expense as 10% of beginning debt. SOLUTION: The iterative procedure results in the following: EBIT $ 3,100 LIABILITIES & EQUITY Interest $ 769 Current Liabs $ 410 $ 680 EBT $ 2,331 Debt $ 5,630 $ 9,751 Tax $ 932 Equity $ 6,500 $ 7,899 EAT $ 1,399 Total L&E $12,540 $18,330 3. Lap Dogs Inc. is planning for next year and has the following summarized results so far ($000): Income Statement EBIT 236 Interest ? EBT ? Income Tax ? EAT ? Balance Sheet This Year Next Year Assets 582 745 Current Liabilities 63 80 Debt 275 ? Equity 244 ? Total Liab & Equity 582 745 The firm pays interest of 12% on all borrowing and is subject to an overall tax rate of 38%. It paid interest of $20,000 this year and plans a $75,000 dividend next year. Complete Lap Dog’s forecast of next year’s financial statements. Round all calculations to the nearest $1,000. Solution: Using this year’s interest as a first guess at next year’s and completing the financial statements yields the following: Income Statement EBIT 236 Interest 20 EBT 216 Income Tax 82 EAT 134 89
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Chapter 4 Balance Sheet This Year Next Year Assets 582 745 Current Liabilities 63 80 Debt 275 362 Equity 244 303 Total Liab & Equity 582 745
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