Here is Problem 1, for reference:
3) Application of Ch 12-13 concepts: determining a firm's quarterly cash need/excess position at the end of each quarter. Does it need to borrow (new loans) or does it have excess cash that will need to be invested in ST investments? This seasonal firm has the following quarterly sales forecast. Quarter Q1 Q2 Q3 Q4 Sales $ 5,000,000 $ 50,000,000 $30,000,000 $ 5,000,000 1. Complete the following chart given a forecasted Net Profit Margin of 7.5% and a Dividend Payout Ratio of 100%. Plowback is the amount of profit the firm reinvests in its operations - so plowback is equal to Profit less Dividends. The amount of plowback will need to be added to the Net Worth line. In this first example, the firm chooses to pay all of its profits to its shareholders and will retain no profit within the firm. Quarter Q1 Q2 Q3 Q4 Sales $5,000,000 $50,000,000 $30,000,000 $5,000,000 Net Profit Dividends Plowback 2. The firm maintains a ratio of Current Assets to Sales of 30% and a ratio of Accounts Payable to Sales of 15%. The only Current Liability is Accounts Payable. Net Fixed Assets are a constant $1.5 M. The capital structure includes $1.5M in net worth at the end of the first quarter. Construct the firm's Balance Sheet at the end of each of the four quarters in the upcoming year forcing the NEW LOANS or NEW S/T INVESTMENTS required: Assets Q1 Q2 Q3 Q4 Current Assets $ 1,500,000 Net Fixed Assets $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 Short Term Investments Total $ 3,000,000 Liabilities and Net Worth Accounts Payable $ 750,000 New Loans $ 750,000 Net Worth $ 1,500,000 Total $ 3,000,000 1) A firm made the following contributions to and withdrawals from the short-term investment portfolio during the past year: Quarter (1) End of Quarter Beginning Interest Earned Change in Balance during Quarter Ending Balance Investment (2) (3) (5) 1,000,000 $ 20,000 $ 1,020,000 $ 250,000 1,270,000 $ 17,000 $ 1,287,000 $ (350,000) Hodling Period Return (3)/(2) (6) 1+ (7) 1 $ 2 3 $ 937,000 $ 12,000 $ 145,000 949,000 $ 1,123,000 $ 4 $ 1,094,000 $ 29,000 $ (450,000) 1. Calculate the effective annual rate of return. K={1 (1 + i) - 1 Where: K = Annual effective rate of return += Time period N- Total number of time periods 1. = Interest rate earned during a period 2. If you simply calculated the rate of return based on the ending ($1,123,000) and beginning ($1,000,000) values, what result would you get and how does that compare to the correct return? 3. Calculate the current ratio for Q1 in pbm 1 assuming the following borrowing strategies: Aggressive Strategy (all new loans are short-term) Conservative Strategy (all new loans are long-term) Moderate Strategy (half of new loans are short-term and the other half are long-term) Conservative Aggressive Moderate Comment on the impact of the financing strategy on liquidity? What are some options for the firm to decrease borrowing? 4. Redo the work assuming a 20% dividend payout ratio (the firm plows back 80% of its profit into Net Worth): Quarter Q1 Q2 Q3 Q4 Sales $ 5,000,000 $ 50,000,000 $ 30,000,000 $ 5,000,000 Net Profit Plowback Assets Q1 Q2 Q3 Q4 $ 1,500,000 Current Assets Net Fixed Assets Short Term Investments $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 Total $ 3,000,000 Liabilities and Net Worth Accounts Payable $ 750,000 New Loans $ 750,000 Net Worth $ 1,500,000 Total $ 3,000,000 3) Application of Ch 12-13 concepts: determining a firm's quarterly cash need/excess position at the end of each quarter. Does it need to borrow (new loans) or does it have excess cash that will need to be invested in ST investments? This seasonal firm has the following quarterly sales forecast. Quarter Q1 Q2 Q3 Q4 Sales $ 5,000,000 $ 50,000,000 $30,000,000 $ 5,000,000 1. Complete the following chart given a forecasted Net Profit Margin of 7.5% and a Dividend Payout Ratio of 100%. Plowback is the amount of profit the firm reinvests in its operations - so plowback is equal to Profit less Dividends. The amount of plowback will need to be added to the Net Worth line. In this first example, the firm chooses to pay all of its profits to its shareholders and will retain no profit within the firm. Quarter Q1 Q2 Q3 Q4 Sales $5,000,000 $50,000,000 $30,000,000 $5,000,000 Net Profit Dividends Plowback 2. The firm maintains a ratio of Current Assets to Sales of 30% and a ratio of Accounts Payable to Sales of 15%. The only Current Liability is Accounts Payable. Net Fixed Assets are a constant $1.5 M. The capital structure includes $1.5M in net worth at the end of the first quarter. Construct the firm's Balance Sheet at the end of each of the four quarters in the upcoming year forcing the NEW LOANS or NEW S/T INVESTMENTS required: Assets Q1 Q2 Q3 Q4 Current Assets $ 1,500,000 Net Fixed Assets $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 Short Term Investments Total $ 3,000,000 Liabilities and Net Worth Accounts Payable $ 750,000 New Loans $ 750,000 Net Worth $ 1,500,000 Total $ 3,000,000 1) A firm made the following contributions to and withdrawals from the short-term investment portfolio during the past year: Quarter (1) End of Quarter Beginning Interest Earned Change in Balance during Quarter Ending Balance Investment (2) (3) (5) 1,000,000 $ 20,000 $ 1,020,000 $ 250,000 1,270,000 $ 17,000 $ 1,287,000 $ (350,000) Hodling Period Return (3)/(2) (6) 1+ (7) 1 $ 2 3 $ 937,000 $ 12,000 $ 145,000 949,000 $ 1,123,000 $ 4 $ 1,094,000 $ 29,000 $ (450,000) 1. Calculate the effective annual rate of return. K={1 (1 + i) - 1 Where: K = Annual effective rate of return += Time period N- Total number of time periods 1. = Interest rate earned during a period 2. If you simply calculated the rate of return based on the ending ($1,123,000) and beginning ($1,000,000) values, what result would you get and how does that compare to the correct return? 3. Calculate the current ratio for Q1 in pbm 1 assuming the following borrowing strategies: Aggressive Strategy (all new loans are short-term) Conservative Strategy (all new loans are long-term) Moderate Strategy (half of new loans are short-term and the other half are long-term) Conservative Aggressive Moderate Comment on the impact of the financing strategy on liquidity? What are some options for the firm to decrease borrowing? 4. Redo the work assuming a 20% dividend payout ratio (the firm plows back 80% of its profit into Net Worth): Quarter Q1 Q2 Q3 Q4 Sales $ 5,000,000 $ 50,000,000 $ 30,000,000 $ 5,000,000 Net Profit Plowback Assets Q1 Q2 Q3 Q4 $ 1,500,000 Current Assets Net Fixed Assets Short Term Investments $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 Total $ 3,000,000 Liabilities and Net Worth Accounts Payable $ 750,000 New Loans $ 750,000 Net Worth $ 1,500,000 Total $ 3,000,000
