Fin105 JTA NAME:______________________________________________

Problem # 1: Assume you are an analyst evaluating Mesco Company. The following data are available
in your financial analysis (unless otherwise indicated, all data are as of December 31, Year 5):

Retained Earnings, 12/31, Year 4 98,000 Days’ Sales in Receivables 18 days

Gross profit margin ratio 25% Equity to Total Debt 4 to 1
Acid test ratio 2.50 Sales ( all on credit ) 920,000
Noncurrent Assets 280,000 Days’ Sales in Inventory 45 days
Common stock: $15 par, 10,000 shares, issued at $21 per share

Required: Using these data, construct the December 31, Year 5 balance sheet for your analysis.
Operating expenses (excluding taxes and cost of goods sold for Year 5) are 180,000. The tax rate is 40%.
Assume a 360-day year in ratio computations. No cash dividends are paid in either Year 4 or Year 5.
Current assets consist of cash, AR and inventory.

Problem # 2: The 1998 sales of Koehlman Technologies were P3M. The dividend payout ratio is 50%.
Retained earnings as shown on December 1987 balance sheet were at P105,000. The percentage of sales
in each balance sheet item that directly varies with sales is expected to be as follows:

Cash : 4% Receivables : 10%

Inventories : 20% Net Fixed assets : 35%
Accounts Payable : 12% Accruals : 6%
Profit margin (after taxes) : 3%

 Complete the balance sheet that follows, assuming that common stock and notes payables did not
change during 1988.
 Supposed sales increased by 30% in 1989, what would the balance sheet for 1989 look like? What
additional funding would be needed to support this growth?

BALANCE SHEET as of END 1988

Cash _______ A/P ________
A/R _______ Notes Payable 130,000
Inventory _______ Accruals ________
Total _______ TOTAL ________
Fixed Assets _______ Common stock 1,250,000
Retained Earnings ________
TOTAL _______ TOTAL ________

Problem # 3: Compute for the needed information about ratios.

a.) Assume you are given the following relationships for the Zumwalt Corporation:
Sales / total assets = 1.5 times
Return on assets (ROA) = 3%
Return on equity (ROE) = 5%
Calculate Zumwalt’s profit margin and debt ratio.

b.) The Hindelang company has 1,312,500 in current assets and 525,000 in current liabilities. Its
initial inventory level is 375,000 and it will raise funds as additional notes payable and use them
to increase inventory. How much can Hindelang’s short-term debt (notes payable) increase
without pushing its current ratio below 2.0? What will be the firm’s quick ratio after Hindeland
has raised the maximum amount of short-term funds?

c.) The WF Bailey Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover of
5 times, total current assets of 810,000, and cash and marketable securities of 120,000 in 1995.
 If the cost of goods sold equaled 86% of sales, what were Bailey’s annual sales and its ACP for
1995?

d.) Wolken Corporation has 500,000 of debt outstanding, and it pays an interest rate of 10 percent
annually. Wolken’s annual sales are 2 million; its average tax rate is 20 percent; and its net
profit margin on sales is 5 percent. If the company does not maintain a Times Interest Earned
Ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What
is Wolken’s Times Interest Earned Ratio?

e.) Coastal Packaging’s ROE last year was only 3 percent, but its management has developed a new
operating plan designed to improve things. The new plan calls for a total debt ratio of 60
percent, which will result in interest charges of 300 per year. Management projects an EBIT of
1,000 on sales of 10,000, and it expects to have a total assets turnover of 2.0. Under these
conditions, the average tax rate will be 30 percent. If the changes are made, what return on
equity will Coastal earn? What is the ROA?

Problem # 4: The Medal Company's recent and forecast sales for certain months in 19X2 and 19X3 are:

July 19X2 75,000 November 150,000

August 50,000 December 75,000
September 50,000 January 19X3 90,000
October 125,000 February 80,000

The September 30, 19X2, balance sheet shows:

ASSETS EQUITIES
Cash 3,000 Accounts payable
Accounts receivable (merchandise) 70,000
(merchandise) 30,000 Dividends payable 1,500
Inventory 75,000 Rent payable 17,500
Prepaid Insurance 1,800 Total liabilities 89,000
Fixtures, net 20,000 Stockholders' equity 40,800
Total assets 129,800 Total equities 129,800

You are to prepare a master budget for the four months ending January 31, l9X3. Sales are forecast at an
average price that is twice the average cost per unit. Monthly operating expenses are as follows:

Wages and salaries 3,800

Insurance expired 200
Depreciation 300
Miscellaneous 3,000
Rent 500 + 10% of sales

Cash dividends of 1,500 are to be paid quarterly, beginning October 15, and are declared on the fifteenth
of the previous month. All operating expenses are paid as incurred, except insurance, depreciation, and
rent. Rent of $500 is paid at the beginning of each month, and the additional 10 percent of sales is paid
quarterly on the tenth of the month following the quarter. The next settlement date is October 10.

The company desires an ending minimum cash balance of $3,000 each month. Inventories are supposed
to equal 120 percent of the next month's cost of goods sold. Purchases during any given month are paid
in full during the following month. All sales are on credit, payable within thirty days, but experience has
shown that 50 percent of current sales are collected in the current month, 40 percent in the next month,
and 5 percent in the month thereafter.

Money can be borrowed and repaid in multiples of $l,000 at an interest rate of 12 percent per annum.
Management wants to minimize borrowing and repay rapidly. At the time the principal is repaid, interest
is computed and paid on the portion of principal that is repaid. Assume that borrowing takes place at the
beginning, and repayment at the end, of the months in question. Money is never borrowed at the
beginning and repaid at the end of the same month. Compute interest to the nearest dollar. Ignore income
taxes.

REQUIRED: Prepare a cash budget and a budgeted income statement.

Problem # 5: Mime Theatrical Supply is in the process of negotiating a line of credit with two local
banks. The prime rate is currently eight percent. The terms follow:
Bank Loan Terms .
1st National 1% above prime rate on a discounted basis and a 20 percent
compensating balance on the face value of the loan.
2nd National 2% above prime rate and a 15 percent compensating balance, interest not
discounted
Calculate the effective interest rate of both banks and recommend which bank's line of credit Mime
Theatrical Supply should accept. (5%)

Problem #6: Giant Feeds, Inc. is considering obtaining funding through advances against receivables.
Total annual credit sales are $1,200,000, terms are net 60 days, and payment is made on the average of
60 days. Western National Bank will advance funds under a pledging arrangement for 13 percent annual
interest. On average, 75 percent of credit sales will be accepted as collateral. Commodity Finance offers
factoring on a non-recourse basis for a 1 percent factoring commission, charging 1.5 percent per month
on advances and requiring a 15 percent factor's reserve. Under this plan, the firm would factor all
accounts and close its credit and collections department, saving $10,000 per year. Assume all interests
(pledging and factoring) are discounted. What is the effective interest rate and the average amount of
funds available under pledging and under factoring? Which plan do you recommend?

Problem # 7:. Burleigh Mills Company has a $5 million revolving credit agreement with First State
Bank Of Arkansas. Being a favored customer, the rate is set at 1 percent over the bank’s cost of funds,
where the cost is the rate on negotiable certificates of depost (CDs). In addition, there is a ½ percent
commitment fee on the unused portion of the revolving credit.
a. If the CD rate is expected to average 9 percent for the coming year and if the company
expects to utilize on average 60 percent of the total commitment, what is the expected annual
dollar cost of this credit arrangement?
b. What is the percentage cost when both the interest rate and the commitment fee paid are
discounted?

Problem # 8:. Kari-Kidd Corporation currently gives credit terms of “net 30 days.” It has $60 million in
credit sales, and its average collection period is 45 days. To stimulate demand, the com- pany may give
credit terms of “net 60 days.” If it does instigate these terms, sales are expected to increase by 15 percent.
After the change, the average collection period is expected to be 75 days, with no difference in payment
habits between old and new cus- tomers. Variable costs are $0.80 for every $1.00 of sales, and the
company’s before-tax required rate of return on investment in receivables is 20 percent. Should the
company extend its credit period? (Assume a 360-day year.)

Problem # 9:. The Acme Aglet Corporation has a 12 percent opportunity cost of funds and currently
sells on terms of “net/10, EOM.” (This means that goods shipped before the end of the month must be
paid for by the tenth of the following month.) The firm has sales of $10 million a year, which are 80
percent on credit and spread evenly over the year. The average collection period is currently 60 days. If
Acme offered terms of “2/10, net 30,” customers representing 60 percent of its credit sales would take the
discount, and the average collection period would be reduced to 40 days. Should Acme change its terms
from “net/10, EOM” to “2/10, net 30”? Why?