ABC Company contemplates the following transactions for the first six months of 2020. The board of the company wants to determine the funding needs of the company and financing issues on a monthly basis. The company has approached a bank to negotiate financing. It typically uses long-term debt and this is forecasted to be $42,000,000 at year-end

• The opening cash of ABC Company is $40,000,000.
• Monthly 2020 sales are expected to be $16,667,000 collected through accounts receivable.
• The 2020 accounts receivable are first received in month 4 and monthly thereafter. The 2019 accounts receivable will be received month 1: $15,600,000, month 2: $15,600,000 and month 3: $15,650,000 (2019 accounts receivable total $46,850,000)
• 2020 variable cost of goods sold are 40% of sales and are paid starting in month 3 and monthly thereafter. 2019 accounts payable of $9,200,000 will be paid in month 1: $4,600,000 and month 2: $4,600,000.
• Fixed costs (excluding depreciation) in cost of goods sold of $1,250,000 a month are paid in the month of sale.
• Other fixed costs (excluding interest) of $4,833,000 a month are paid in the month of sale.
• The company will buy equipment for $55,000,000 in month 1.
• Inventory of $550,000 will be purchased in month 1.
• Interest of $1,000,000 will be paid in month 6. The increase in long-term debt over 2019 of $11,200,000 is to be finalized after the monthly cash flow study is complete. It is scheduled for month 12.
• Taxes of $5,000,000 will be paid in months 3 and 6.
• Dividends of $5,000,000 will be paid in month 6.
• ABC Company would like $10,000,000 of cash on hand at all times for emergency purposes. It expects cash flows in the last 6 months of 2020 to be $16,366,000 including the increased long-term debt.

Required:

1. Prepare a monthly cash flow budget for the first six (6) months of 2020 for ABC Company. (10 marks)
2. Discuss the maximum financing that ABC Company will require in the first six months of 2020. Is the $11,200,000 increase in long-term debt adequate? Note: $2,000,000 of interest will be paid in the 2020 fiscal year. Also, note: the maximum long-term debt to equity ratio is 0.3:1. (4 marks)
3. Which financing strategy has the ABC Company been using to-date? (Closest strategy) (3 marks)
4. What terms would you negotiate regarding the financing of ABC operations? (3 marks)

ABC Company Balance Sheet Actual December 31, 2019 (in $000's) Assets Liabilities & Shareholders' Equity Cash $ 40.000 Accounts payable (days 35) $ 9,200 Accounts receivable (days 90) 46,850 Long-term debt 30.800 Inventory (days 50) 13.150 Buildings and equipment 150,000 Accumulated amortization- Buildings and equipment (50.000) Common shares 100,000 Retained earnings 60.000 S200.000 $200.000 Assets Cash Accounts receivable (days 95) Inventory (days 50) Buildings and equipment Accumulated amortization- Buildings and equipment ABC Company Forecasted Balance Sheet December 31, 2020 (in $000's) Liabilities & Shareholders Equity $9,300 Accounts payable (days 47) $ 13,000 52.000 Long-term debt 42,000 13,700 205,000 (55.000) Common shares Retained earnings 100,000 70.000 S225.000 $225.000 During 2020, ABC Company (ABC) is expected to have a net income of $20,000,000 and has a 50% dividend payout ratio. The company desires to have a minimum cash level of $10,000,000 This goal was 5% of its 2019 total assets. Cash has not been adjusted in the forecast for 2020 Depreciation and amortization of $5,000,000, new equipment purchases of $55,000,000 and interest expense of $2,000,000 was included in the 2020 forecast. The condensed income statements for forecasted 2020 and actual 2019 are as follows (in 5000's) 2020 2019 Sales $200,000 $190,000 Cost of sales (variable COGS) (80.000 (76,000) Fored costs in COGS (ind. Dep) ( 20.000 (20,000) Other Fored costs (incl. Interest) (60.000 (60,000) Taxes 20.000 16.000 Net income $20.000 S 18.000 XYZ Company (XYZ) is considering buying ABC Company for $180,000,000 to $200,000,000 at the beginning of 2020. XYZ financing of the purchase is outside the scope of this case. Also, the price of the company should not be more than 4 times Earnings before Interest Taxes, Depreciation and Amortization (EBITDA) The CFO of XYZ will only recommend buying if ABC has positive operating cash flows, maintains a current ratio of minimum 1:1, has a massimum interest bearing debt to equity ratio of 0.3.1, has reasonable cash levels and other key operating ratios are trending positively XYZ requires a 10% WACC in accepting investments and at least a 13.33% return for equity holders. The XYZ CFO thinks, as well that maintaining a cash level of 45 days foced costs could be prudent for ABC Company and/or a line of credit should be pursued ABC Company Balance Sheet Actual December 31, 2019 (in $000's) Assets Liabilities & Shareholders' Equity Cash $ 40.000 Accounts payable (days 35) $ 9,200 Accounts receivable (days 90) 46,850 Long-term debt 30.800 Inventory (days 50) 13.150 Buildings and equipment 150,000 Accumulated amortization- Buildings and equipment (50.000) Common shares 100,000 Retained earnings 60.000 S200.000 $200.000 Assets Cash Accounts receivable (days 95) Inventory (days 50) Buildings and equipment Accumulated amortization- Buildings and equipment ABC Company Forecasted Balance Sheet December 31, 2020 (in $000's) Liabilities & Shareholders Equity $9,300 Accounts payable (days 47) $ 13,000 52.000 Long-term debt 42,000 13,700 205,000 (55.000) Common shares Retained earnings 100,000 70.000 S225.000 $225.000 During 2020, ABC Company (ABC) is expected to have a net income of $20,000,000 and has a 50% dividend payout ratio. The company desires to have a minimum cash level of $10,000,000 This goal was 5% of its 2019 total assets. Cash has not been adjusted in the forecast for 2020 Depreciation and amortization of $5,000,000, new equipment purchases of $55,000,000 and interest expense of $2,000,000 was included in the 2020 forecast. The condensed income statements for forecasted 2020 and actual 2019 are as follows (in 5000's) 2020 2019 Sales $200,000 $190,000 Cost of sales (variable COGS) (80.000 (76,000) Fored costs in COGS (ind. Dep) ( 20.000 (20,000) Other Fored costs (incl. Interest) (60.000 (60,000) Taxes 20.000 16.000 Net income $20.000 S 18.000 XYZ Company (XYZ) is considering buying ABC Company for $180,000,000 to $200,000,000 at the beginning of 2020. XYZ financing of the purchase is outside the scope of this case. Also, the price of the company should not be more than 4 times Earnings before Interest Taxes, Depreciation and Amortization (EBITDA) The CFO of XYZ will only recommend buying if ABC has positive operating cash flows, maintains a current ratio of minimum 1:1, has a massimum interest bearing debt to equity ratio of 0.3.1, has reasonable cash levels and other key operating ratios are trending positively XYZ requires a 10% WACC in accepting investments and at least a 13.33% return for equity holders. The XYZ CFO thinks, as well that maintaining a cash level of 45 days foced costs could be prudent for ABC Company and/or a line of credit should be pursued