line of credit p. 307 percentage-on You Make the Call Situation 1 D&R Products, Inc., used as an example in this chapter, is an actual firm (although some of the facts were changed to maintain confi- dentiality), David Allen bought the firm from its founding owners and moved its operations to his hometown. Although he has esti- mated the firm's asset needs and financing requirements, he can not be certain that these projections will be realized. The figures merely represent the most-likely case. Allen also made some pro- jections that he considers to be the worst-case and best-case sales and profit figures. If things do not go well, the firm might have sales of only $200,000 in its first year. However, if the potential of the business is realized, Allen believes that sales could be as high as $325,000. If he needs any additional financing beyond the exist ing line of credit, he could conceivably borrow another $5,000 in short-term debt from the bank by pledging some personal invest ments. Any additional financing would need to come from Allen himself, thereby increasing his equity stake in the business. Question If all of D&R Products other relationships hold, how will Allen's worst case and best-case projections affect the Income statement and balance sheet in the first year? To help you in your analysis, D&R Product's pro forma statements, as presented in Exhibits 11.1. 11.3, and 114, are available at CengageBrain.com (select the Longenecker text). Situation 2 The firm has a monthly rental expense of $5,000. Wages and salaries for the coming months are estimated at $25,000 per month of the firm's sales, 25 percent is collected in the month of the sale, 35 percent one month after the sale, and the remaining 40 percent two months after the sale. Merchandise is purchased one month before the sales month and is paid for in the month it is sold. Purchases equal 75 percent of sales. Tax prepayments are made quarterly, with a prepayment of $10,000 in October based on earnings for the quarter ended September 30 Utility costs for the firm average 3 percent of sales and are paid in the month they are incurred. Depreciation expense is $20,000 annually, Question 1 Prepare a monthly cash budget for the three month period ending in December. Question 2 If the firm's beginning cash balance for the budget period is $7,000, and this is its desired minimum balance deter- mine when and how much the firm will need to borrow during the budget period. The firm has a $50,000 line of credit with its bank with interest (10 percent annual rate) paid monthly. For example, Interest on a loan taken out at the end of September would be paid at the end of October and every month thereafter as long as the loan was outstanding. line of credit p. 307 percentage-on You Make the Call Situation 1 D&R Products, Inc., used as an example in this chapter, is an actual firm (although some of the facts were changed to maintain confi- dentiality), David Allen bought the firm from its founding owners and moved its operations to his hometown. Although he has esti- mated the firm's asset needs and financing requirements, he can not be certain that these projections will be realized. The figures merely represent the most-likely case. Allen also made some pro- jections that he considers to be the worst-case and best-case sales and profit figures. If things do not go well, the firm might have sales of only $200,000 in its first year. However, if the potential of the business is realized, Allen believes that sales could be as high as $325,000. If he needs any additional financing beyond the exist ing line of credit, he could conceivably borrow another $5,000 in short-term debt from the bank by pledging some personal invest ments. Any additional financing would need to come from Allen himself, thereby increasing his equity stake in the business. Question If all of D&R Products other relationships hold, how will Allen's worst case and best-case projections affect the Income statement and balance sheet in the first year? To help you in your analysis, D&R Product's pro forma statements, as presented in Exhibits 11.1. 11.3, and 114, are available at CengageBrain.com (select the Longenecker text). Situation 2 The firm has a monthly rental expense of $5,000. Wages and salaries for the coming months are estimated at $25,000 per month of the firm's sales, 25 percent is collected in the month of the sale, 35 percent one month after the sale, and the remaining 40 percent two months after the sale. Merchandise is purchased one month before the sales month and is paid for in the month it is sold. Purchases equal 75 percent of sales. Tax prepayments are made quarterly, with a prepayment of $10,000 in October based on earnings for the quarter ended September 30 Utility costs for the firm average 3 percent of sales and are paid in the month they are incurred. Depreciation expense is $20,000 annually, Question 1 Prepare a monthly cash budget for the three month period ending in December. Question 2 If the firm's beginning cash balance for the budget period is $7,000, and this is its desired minimum balance deter- mine when and how much the firm will need to borrow during the budget period. The firm has a $50,000 line of credit with its bank with interest (10 percent annual rate) paid monthly. For example, Interest on a loan taken out at the end of September would be paid at the end of October and every month thereafter as long as the loan was outstanding