Advanced Financial Management

Techno Toys Case

The most recent financial statements for Techno Toys are contained in Exhibit $1.$

Suppose that the controller has decided to seek out a term loan, which proceeds could be used to repay $$650,000$ of the firm's short$-$term notes. The particular note in question was due in March of the coming year. Part of the needed funds was expected to come from operations and another portion from the sale of fixed assets during January for $$100,000($accumulated depreciation on the assets is $$150,000,$ while the original purchase price was $$250,000).$

In addition to paying off the short$-$term note in March, the controller felt the firm should increase its cash balance to a minimum level of $$75,000.$ The controller hoped to be able to hold out with the firm's existing cash balance, $$30,000,$ plus cash flow from operations, until March, when he intended to seek the long$-$term loan. The proceeds from the loan in conjunction with funds from operations would be used to clear up $$650,000$ in notes payable and reach the desired cash balance.

Sales estimates for the next seven months, as well as past monthly sales for the previous three months are presented in Exhibit $2.$

Traditionally, Techno's sales have been $60\%$ credit and $40\%$ cash. Its gross profit margin is expected to improve from $25\%$ to $30\%.$ Of the credit sales, roughly half are collected one month after the sale and the remainder collected two months after the sale, with negligible bad debt losses. Purchases are approximately $75\%$ of sales and are made one month in advance, with payment following in $60$ days. Variable cash operating expenses $($including selling costs, wages, advertising, and miscellaneous cash expenses$)$ are $7\%$ of sales and are paid in the month in which they are incurred. Fixed cash operating expenses are roughly $$6,250$ a month, with payment made in the same month. Taxes are paid quarterly $($April for the quarter ended in March, and so on; assume $\frac{1}{4}$ of last year's taxes have not been paid.$)$ based on estimated earnings for the quarter. Annual depreciation expense is $$240,000$ on the net assets remaining after the January $1,2023$ sale of fixed assets. Interest expense for the note payable is $10\%$ and is payable quarterly in March and June. Interest on the outstanding long$-$term debt is at a rate of $7\%$ and is paid semi$-$annually in June and December. The term loan is expected to carry an $8\%$ rate, with interest payable semi$-$annually beginning in September and the entire principal amount due in five years.

a$.$ Prepare a monthly cash budget for the first $6$ months of $2023.$

b$.$ Prepare a balance sheet and income statement for the quarter ended March $31$ and $6$months ended June $30.($You will have two balance sheets, one as of March $31$ and the other as of June $30.$ You will have two income statements; one for the $3-$months ended March $31$ and the other for the $6-$months ended June $30.($You DO NOT have to prepare monthly balance sheets and income statements$)$

c$.$ Based on your answer to question a$.,$ how much should Techno seek in additional longterm debt to pay off the $$650,000$ of the note and increase cash to $$75,000$ as of the end of March?

d$.$ How did Techno Toys get into its cash flow predicament?

Exhibit $1$

December $31,2021$

December $31,2022$

$\backslash$table$[[$Cash$,90,000],[$Accounts Receivable,$150,000],[$Inventory$,275,000],[$Total current assets,$515,000],[$Plant and Equipment,$3,335,000$