Question (5) Directions: Click the "Case-link" displayed above and use the information provided in Hearth and Home, Parts A and B, to answer this question: Which of the following describes a best-case projection scenario for Hearth and Home? Twenty to twenty-two percent sales growth due to additional maintenance, repair and replacement revenues Two to five percent sales growth due to higher retail sales Twenty-five to thirty percent growth due to higher retail sales Thirty-five to forty percent sales growth due to additional retail and contracting sales Question (6) Directions: Click the "Case-link" displayed above and use the information provided in Hearth and Home, Parts A and B, to answer this question: In a best-case scenario, you might assume that in the beginning of 2014 Hearth and Home hires someone to fill the new position of financial assistant. At least half of her time is expected to be devoted to administering and collecting accounts receivable. If so, which of the following hypotheses would be the most reasonable for 2014? Accounts receivable days on hand will be 41 days Accounts receivable days on hand will be 38 days Accounts receivable days on hand will be 35 days Net profit margin will rise to 7.8 percent Hearth and Home Part A Company Information Hearth and Home sells, installs, and services residential fireplaces. Formed 22 years ago by Len Wilkinson as a retailer of fireplaces and accessories, the company installed virtually all of the fireplaces it sold and guaranteed its work for 10 years. The company built a reputation for prompt, quality workmanship and gradually, starting six years ago, several of the area's leading contractors began to subcontract chimney and fireplace installation to Hearth and Home. During its early years, most of the company's sales took place from October to March. As it expanded, subcontracting sales occurred throughout the year, though slightly more in the summer months. Sales are now fairly evenly divided between retail and subcontracting. The Wilkinsons have financed the company with long-term debt. The family has provided term loans totaling $350,000, and your organization has provided $200,000 in long-term debt. Your organization also made available to the company what is now a $400,000 revolving credit. H and H may borrow up to 50 percent of receivables outstanding for less than 60 days and up to 40 percent of inventory, excluding inventory work in process. The company must be out of debt for 30 consecutive days during the second quarter of every calendar year. Until the end of 20Y3, the company was a model customer, meeting the second quarter 30-day clean-up requirement fairly easily in 20Y1 and 20Y2. At the end of fiscal 20Y3, however, the company was unable to clean up the line. In fact, at the end of June, the outstanding balance was $101,000, the company having been unable to reduce the line significantly below $100,000 at any time during the entire second quarter. The balance outstanding on the last day for which you have data was $153,000. John Holmgren is the lender responsible for the relationship, and he has asked you for assistance in deciding how to handle the loan. When the company could not meet the cleanup requirement, John waived the requirement based on the company's past history and performance. In John's opinion, H and H's management has such high integrity that your organization will be able to recover its money; he believes that the owners would sell their houses if necessary to repay the debt. Having said that, John is also aware that the owning family depends upon dividend income and considers an annual dividend of at least $80,000 to be mandatory. John is feeling the dissatisfaction of credit management, which is unhappy with his decision to waive the clean-up. He needs to come up with a solution to the problem that will meet both the company's and your organization's needs. As you and John discuss the situation, he tells you that H and H's management expects sales to increase significantly in 20Y4 and that part of that increase will be due to additional contracting - mainly repairing older installations by a couple of competitors that have since gone out of business. The Wilkinsons have proposed that the limit on the revolving credit be increased to $500,000. Hearth and Home Part B Hearth and Home Balance Sheets (in $000s) As At June 30: 20Y3 2012 20Y1 $ $ ASSETS Current assets Cash Accounts receivable Inventory Other current assets Total current assets 123 303 66 376 547 107 1,096 100 240 417 461 70 11.7 957 874 Fixed assets 313 257 245 Trademarks and goodwill 107 TOTAL ASSETS $ 1,516 $ 1,285 $ 1,190 $ 67 $ 1015 67 $ 67 LIABILITIES AND OWNERS' EQUITY Current liabilities Current portion-LTD Notes payable Accounts payable Accrued expenses Other current liabilities Total current liabilities 244 204 148 57 47 319 368 Long-term debt 397 464 Other noncurrent liabilities 19 18 Owners' equity 501 389 TOTAL LIABILITIES AND OWNERS' EQUITY $ 1,516 $ 1,285 $ 1,190 Working investment $ 610 $ 496 $ 452 Hearth and Home Part B Hearth and Home Income Statements (in $000s) Years Ended June 30: 2093 3,570 2,467 1,103 $ Sales Cost of goods sold Gross profit $ 20Y2 3,000 2,093 907 2011 2,500 1,773 727 36 33 60 Interest expense Depreciation expense Operating expense Profit before taxes 36 50 371 270 52 477 345 586 421 Taxes 188 149 108 Net profit after taxes 233 $ 196 162 Dividends 95 84 65 Earnings retained $ 138 $ 112 $ 97 arth and Home Part 1 Quick Cash Flow (in $0005) Company Name. Hearth and Home WI GFA (U) (U) S S 20Y2 2013 196 52 (44) 233 60 (114) Net profit Plus: Depreciation, amortization expense Plus (or less): A Working investment Equals: Cash after operating cycle Plus (or less): A Gross fixed assets Equals: Cash after capital investment cycle 204 179 (12) 192 (92) 87 (95) Less: Dividends declared Equals: Cash available for all debt repayment (84) 108 (8) Less: Current partion long-term debt (prior year) Equals: Cash available for other debt repayment (67) 41 (67) (75) Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment BEGINNING 240 417 148 ENDING 303 461 204 64 57 452 496 4527 Beginning working investment Less: Ending working investment Equals: A Working investment 496 (44) 20Y2 Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment BEGINNING 303 461 204 64 496 ENDING 376 547 244 69 610 Beginning working investment Less: Ending working investment Equals: A Working investment 496 610 (114) 20Y3 BEGINNING ENDING Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Are any changes in income taxes payable, interest payable, prepaid expenses, investments, or miscellaneous other accounts large enough to distort quick cash flow? Question (5) Directions: Click the "Case-link" displayed above and use the information provided in Hearth and Home, Parts A and B, to answer this question: Which of the following describes a best-case projection scenario for Hearth and Home? Twenty to twenty-two percent sales growth due to additional maintenance, repair and replacement revenues Two to five percent sales growth due to higher retail sales Twenty-five to thirty percent growth due to higher retail sales Thirty-five to forty percent sales growth due to additional retail and contracting sales Question (6) Directions: Click the "Case-link" displayed above and use the information provided in Hearth and Home, Parts A and B, to answer this question: In a best-case scenario, you might assume that in the beginning of 2014 Hearth and Home hires someone to fill the new position of financial assistant. At least half of her time is expected to be devoted to administering and collecting accounts receivable. If so, which of the following hypotheses would be the most reasonable for 2014? Accounts receivable days on hand will be 41 days Accounts receivable days on hand will be 38 days Accounts receivable days on hand will be 35 days Net profit margin will rise to 7.8 percent Hearth and Home Part A Company Information Hearth and Home sells, installs, and services residential fireplaces. Formed 22 years ago by Len Wilkinson as a retailer of fireplaces and accessories, the company installed virtually all of the fireplaces it sold and guaranteed its work for 10 years. The company built a reputation for prompt, quality workmanship and gradually, starting six years ago, several of the area's leading contractors began to subcontract chimney and fireplace installation to Hearth and Home. During its early years, most of the company's sales took place from October to March. As it expanded, subcontracting sales occurred throughout the year, though slightly more in the summer months. Sales are now fairly evenly divided between retail and subcontracting. The Wilkinsons have financed the company with long-term debt. The family has provided term loans totaling $350,000, and your organization has provided $200,000 in long-term debt. Your organization also made available to the company what is now a $400,000 revolving credit. H and H may borrow up to 50 percent of receivables outstanding for less than 60 days and up to 40 percent of inventory, excluding inventory work in process. The company must be out of debt for 30 consecutive days during the second quarter of every calendar year. Until the end of 20Y3, the company was a model customer, meeting the second quarter 30-day clean-up requirement fairly easily in 20Y1 and 20Y2. At the end of fiscal 20Y3, however, the company was unable to clean up the line. In fact, at the end of June, the outstanding balance was $101,000, the company having been unable to reduce the line significantly below $100,000 at any time during the entire second quarter. The balance outstanding on the last day for which you have data was $153,000. John Holmgren is the lender responsible for the relationship, and he has asked you for assistance in deciding how to handle the loan. When the company could not meet the cleanup requirement, John waived the requirement based on the company's past history and performance. In John's opinion, H and H's management has such high integrity that your organization will be able to recover its money; he believes that the owners would sell their houses if necessary to repay the debt. Having said that, John is also aware that the owning family depends upon dividend income and considers an annual dividend of at least $80,000 to be mandatory. John is feeling the dissatisfaction of credit management, which is unhappy with his decision to waive the clean-up. He needs to come up with a solution to the problem that will meet both the company's and your organization's needs. As you and John discuss the situation, he tells you that H and H's management expects sales to increase significantly in 20Y4 and that part of that increase will be due to additional contracting - mainly repairing older installations by a couple of competitors that have since gone out of business. The Wilkinsons have proposed that the limit on the revolving credit be increased to $500,000. Hearth and Home Part B Hearth and Home Balance Sheets (in $000s) As At June 30: 20Y3 2012 20Y1 $ $ ASSETS Current assets Cash Accounts receivable Inventory Other current assets Total current assets 123 303 66 376 547 107 1,096 100 240 417 461 70 11.7 957 874 Fixed assets 313 257 245 Trademarks and goodwill 107 TOTAL ASSETS $ 1,516 $ 1,285 $ 1,190 $ 67 $ 1015 67 $ 67 LIABILITIES AND OWNERS' EQUITY Current liabilities Current portion-LTD Notes payable Accounts payable Accrued expenses Other current liabilities Total current liabilities 244 204 148 57 47 319 368 Long-term debt 397 464 Other noncurrent liabilities 19 18 Owners' equity 501 389 TOTAL LIABILITIES AND OWNERS' EQUITY $ 1,516 $ 1,285 $ 1,190 Working investment $ 610 $ 496 $ 452 Hearth and Home Part B Hearth and Home Income Statements (in $000s) Years Ended June 30: 2093 3,570 2,467 1,103 $ Sales Cost of goods sold Gross profit $ 20Y2 3,000 2,093 907 2011 2,500 1,773 727 36 33 60 Interest expense Depreciation expense Operating expense Profit before taxes 36 50 371 270 52 477 345 586 421 Taxes 188 149 108 Net profit after taxes 233 $ 196 162 Dividends 95 84 65 Earnings retained $ 138 $ 112 $ 97 arth and Home Part 1 Quick Cash Flow (in $0005) Company Name. Hearth and Home WI GFA (U) (U) S S 20Y2 2013 196 52 (44) 233 60 (114) Net profit Plus: Depreciation, amortization expense Plus (or less): A Working investment Equals: Cash after operating cycle Plus (or less): A Gross fixed assets Equals: Cash after capital investment cycle 204 179 (12) 192 (92) 87 (95) Less: Dividends declared Equals: Cash available for all debt repayment (84) 108 (8) Less: Current partion long-term debt (prior year) Equals: Cash available for other debt repayment (67) 41 (67) (75) Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment BEGINNING 240 417 148 ENDING 303 461 204 64 57 452 496 4527 Beginning working investment Less: Ending working investment Equals: A Working investment 496 (44) 20Y2 Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment BEGINNING 303 461 204 64 496 ENDING 376 547 244 69 610 Beginning working investment Less: Ending working investment Equals: A Working investment 496 610 (114) 20Y3 BEGINNING ENDING Change in working investment Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Are any changes in income taxes payable, interest payable, prepaid expenses, investments, or miscellaneous other accounts large enough to distort quick cash flow