CMR 302

TEST 3
 Financing Operations

1. What forms of financing would a company pursue in Growth 2 of the Financing life cycle?
Growth 2 of the company life cycle is the growth phase. During the stage, the company is actively
growing and therefore need a more significant amount of capital for expansion. At the growth phase, the
company will have mostly exhausted the internal sources of funds. Thus, firms will primarily acquire
external sources such as debt capital like the bank loans and the equity capital through subscription of the
shares to the general public.
2. List an advantage and disadvantage of obtaining funds from “Angel Investors”
An angel investor refers to a person that invests in a small scale businesses by issuing the startup capital
or the funds for the company expansion activities. Mostly, the angel investors are looking for a business
which promise a higher level of return to invest their available surplus capital. Angel investors provide
capital for the business that needs a higher level of equity financing. The investors normally provide
funding for an exchange of the company share. Therefore, in situations where the business faces cash
flow problems or the collateral security for obtaining the loans, Angel funding would be their only
remedy. Angel funding is advantageous to the small and large business organizations in that they carry a
lower level of risk as compared to the debt finances. In the event of the company failure, the business
does not have to settle back the Angel funds. On the other hand, the major disadvantage of the Angel
investors is that the businesses loses control of ownership to the investors. Therefore the owners of the
business may not able to make a significant financial decision regarding the growth of their companies.
3. Companies continue to receive funds in the Secondary Market? T F
The statement is False. The nature of the secondary market is that it allows the investors who own the
company stocks to buy and sell the stock without the indulgence of the company. In regard, the profits
and losses that are realized during the trading process are shared explicitly by the investors and the
company does not possess any monetary benefit. Companies may only benefit from the secondary market
if their stock prices have risen. The rise in the value of the company stock increase their market
capitalization and therefore can opt for more equity funding.
4. Identify a primary difference between common and preferred stock.
Preferred stock has liquidity preference over those of the common stock. Therefore
during the company liquidation and dissolution, the preferred stockholders will get their
dues before the common stockholders. Again, the common stockholders have voting
right over the company while the preference shareholders do not participate in the
company decision-making process.
5. Which financing life cycle phase would a company pursue an IPO?
Most companies will pursue an initial public offer (IPO) during the growth stage of the financing life
cycle. At the stage, the company need funds for its expansion activities hence may go for the IPO from
the general public to raise more funds.
Breakeven Analysis
6. Fixed Expenses change in total when there is a modest change in sales. TRUE FALSE
FALSE
7. An example of a fixed expense would be a 5% sales commission. TRUE FALSE
FALSE
8. Property taxes and rent are often considered variable expenses. TRUE FALSE
FALSE
9. Variable expenses change in total as volume changes. TRUE FALSE
 TRUE
10. If a company requires a profit of $30,000 (instead of breaking even), the $30,000 should be
combined with the fixed expenses in order to compute the point at which the company will earn
$30,000. TRUE FALSE

TRUE

11. The contribution margin per unit is the selling price per unit minus the fixed expenses per unit.
TRUE FALSE
FALSE
Use this information to answer questions 12 through 14: SHOW YOUR WORK

12. What is the company's contribution margin?

Contribution margin (CM) =Selling price per unit-variable cost per unit= ((17-(3+4)) =$ 10
13. What is the break-even point in units?
Break-even point in units=Fixed cost ÷ (selling price per unit-variable cost per unit)
BEP (Units) =140,000÷ 10=14,000 units
14. If the company wants to earn a profit of $ 20,000 instead of breaking even, what is the
number of units the company must sell?
Number of units to be sold= (Fixed cost +target profit¿ ÷contribution margin
Number of units to be sold= (140,000+20,000)÷ 10= 16,000 units
Business Cash Flow
15. From a cash flow perspective, what does it mean to “train your customers”?
It means training the business customers to settle their debts in time to help the company to
avoid cash flow or cash management problems.
16. How can a business use vendors to help with the cash flow of a business?
The vendor can give the company some grace period before making the payment. The move
will assist the company to sort out its cash flow issues before actually making a decision on
paying the vendor.
Internal Control
17. Separation of Duties in a small business is not a practical internal control solution due to
the small number of employees T F
FALSE
 17. Identify two prevention techniques that a small business owner might employ to
prevent fraud
The small business owner may prevent fraud employing a strong internal control system and
employing a systematic accounting system that can easily track on the business transactions
without the possibility of manipulation.
18. What is the number one way that fraud is detected?
Through conducting the financial audit.
20. The company accountant should open and reconcile the monthly bank statement before
anyone else can gain access to the data in order to prevent fraud. T F
True
Breakeven Analysis
Your client manages a daycare center. Costs are as follows:
Food costs $ 90
Rent 36,000
Salaries 80,000
Material costs 60
Taxes 20,000
Insurance 12,000
Miscellaneous 8,000

You currently charge $ 500 per month per child. You plan a profit of $ 25,000 per year.

Using the Breakeven analysis spreadsheet, complete the analysis and save the file as BE1. Submit via
Canvas.

Answer the following questions

Total Variable Costs $ 28,150

Total Fixed Costs $ 128,000
Breakeven Point in Units per year 30 units
Breakeven Point in Dollars per year (30*500*12) =$ 180,000
Your friend is considering moving the business location to a more expensive neighborhood. Costs will
change as follows:

Food costs $ 120

Rent 50,000
Salaries 100,000
Material costs 75
Taxes 30,000
Insurance 14,000
Miscellaneous 12,000
The monthly fee per child would be $ 700 and the profit component would increase to $ 50,000.
Answer the following questions
Total Variable Costs 42,195
Total Fixed Costs 164,000
Breakeven Point in Units per year 325
Breakeven Point in Dollars per year 2,730,000
Using the Breakeven analysis spreadsheet, complete the analysis and save the file as BE2. Submit via
Canvas.
Based on your review of the two scenarios list the pros and cons of moving to the new location. Make
sure you include data from the spreadsheets to support your answer. Use Word to complete your
answer. Submit via Canvas
PROS
The company will experience a higher profit margin due to increase in the selling price.
CONS
Higher cost of operating the day care and the high price may deter the customer from taking their
children to the day care.
RECOMMENDATION
The company should not move to the more expensive location since the operation cost
will increase.
Cash Budget
Access the Car Detailing Analysis (document in Canvas, under Test 3 instructions).
Complete the Cash Budget (file in Canvas, under Test 3 instructions). The breakdown
of sales per month are as follows:
Month 1 20 Month 7 120
Month 2 30 Month 8 130
Month 3 60 Month 9 120
Month 4 60 Month 10 90
Month 5 70 Month 11 40
Month 6 120 Month 12 50

Starting cash =$ 2,000

Upon completion of the Cash Budget, answer the following questions:

1. What month has the highest cash deficit Month March Amount
200

2. What month has the highest cash surplus Month January Amount
230

3. What month(s) must the company borrow money Month(s) 1,000

4. What is the ending cash balance for Month 6 1,500

Submit the Cash Forecast spreadsheet and the answers to the questions via Canvas.