Question 1 (40 marks) Summit Inc. is developing a plan to finance its asset base, the details of which are listed below. $ 5 Current assets Proportion of current assets which are permanent Capital assets Long-term interest rates Short-term interest rates Corporate tax rate 150.000 10% 1.200.000 14.0% 80% 40% 4.300.000 EBIT a) Construct a perfectly hedged financing plan. What will Summits net income be? b) A finance manager has proposed an alternative financial plan. Use the information from part a except for what is listed below. What will net income be under this amative? Proportion of assets financed with long-term financining 50% Remainder financed with short-term financing c) Would you consider the perfectly hedged plan to be more or less risky than the alterative plan in part b? Question 2 (16 marks) Rommelere Sporting Goods makes exceptional gloves that sell well in the spring and early summer season. A projection of units sold is as follows: March 4,800 April 8,800 May 16,000 June 14.000 44.500 seasonal production is used. It is assumed that production will direct match sales for each month and there will be no inventory build-up. The production manager thinks the above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the required items with equal production in each of the four months Required What is the ending inventory at the end of each month? (The beginning inventory in March was zero units) Question 3 (14 marks) John Boy's Manufacturing Company expects sales of the following amounts, depending upon the strength of the economy. What is the expected level of sales for next year? Strength of the economy Probability of occurrence Sales Strong 30% $ 890.000 Steady 45% $ 510.000 Weak 25% $ 250,000 Question 1 (40 marks) Summit Inc. is developing a plan to finance its asset base, the details of which are listed below. $ 5 Current assets Proportion of current assets which are permanent Capital assets Long-term interest rates Short-term interest rates Corporate tax rate 150.000 10% 1.200.000 14.0% 80% 40% 4.300.000 EBIT a) Construct a perfectly hedged financing plan. What will Summits net income be? b) A finance manager has proposed an alternative financial plan. Use the information from part a except for what is listed below. What will net income be under this amative? Proportion of assets financed with long-term financining 50% Remainder financed with short-term financing c) Would you consider the perfectly hedged plan to be more or less risky than the alterative plan in part b? Question 2 (16 marks) Rommelere Sporting Goods makes exceptional gloves that sell well in the spring and early summer season. A projection of units sold is as follows: March 4,800 April 8,800 May 16,000 June 14.000 44.500 seasonal production is used. It is assumed that production will direct match sales for each month and there will be no inventory build-up. The production manager thinks the above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the required items with equal production in each of the four months Required What is the ending inventory at the end of each month? (The beginning inventory in March was zero units) Question 3 (14 marks) John Boy's Manufacturing Company expects sales of the following amounts, depending upon the strength of the economy. What is the expected level of sales for next year? Strength of the economy Probability of occurrence Sales Strong 30% $ 890.000 Steady 45% $ 510.000 Weak 25% $ 250,000
