QUESTION 1.

Which of the following would NOT avoid negative cash balances?

1. Carl taking no salary
2. Not paying a dividend
3. Paying for insurance on a monthly basis
4. Buying 25% less computers in January and February

QUESTION 2.

Assuming a cost of capital of 1% per month, the present value of the forecast operating cash flows will be:

1. (5,634)
2. (2,820)
3. 1,142
4. 2,287
5. 

When Carl is made redundant, he decides to run a business selling and repairing computers. In order to do this, he sets up a limited company, Gigabit Limited. He plans to deposit 5,000 in the company's bank account on 1 January 2022 and issue 5,000 shares, with a nominal value of 1 each, in his own name. He also plans to borrow 3,000 from his father. Carl will rent premises for his business at 2,000 a month and lease test and IT equipment for 500 a month. He will pay 3,000 for signage and furniture. For each of the first two months he will spend 7,000 on computers for resale and components for repairs. In the third month he hopes to buy 7,500 of computers on credit. At the outset, he will hire a technician, at a cost of 1,900 a month, to do the repair work, whilst he mostly deals with selling and administration. He will pay himself 800 a month in salary and plans to take further income as dividends. He estimates that he will use 250 worth of electricity per month, to be paid in April. He will pay 1,400 for 12 months' insurance. Other expenses paid for during the period will be: per month Rates 350 Utilities (excluding electricity) 300 Advertising 300 Mileage 200 Each month he hopes to sell computers for 8,750 and charge 2,400 for repairs. At the end of 3 months he expects to have unsold inventory, which would had cost him 10,000. He will depreciate non-current assets at a rate of 20% of original cost per year Gigabit Ltd Cash budget for the 3 months to 31 March 2022 Jan Feb Mar Total Cash in Shares Loan Sales Repairs Total 5000 5,000 3.000 3,000 8,750 8,750 8,750 26,250 2,400 2,400 2,400 7,200 19,150 11,150 11,150 41,450 2.000 2,000 6.000 500 2,000 3,000 500 7,000 1,900 800 500 7,000 1,900 800 1,900 800 Cash out Rent Signage and furniture Leasing of equipment Computers/components Technician Carl's salary Dividend Electricity Insurance Rates Utilities (excluding electricity) Advertising Mileage Total 1,500 14,000 5,700 2,400 1,650 1,650 1,400 350 1,400 1,050 350 350 300 300 300 300 900 300 300 900 200 200 200 600 17,750 13,350 8,000 39,100 2,350 Net cash in Opening balance Closing balance 1,400 (2,200) 3,150 0 1,400 (800) 1,400 (800) 2,350