Corporate Finace For TOM MUTUNGA

1.

Bombs Away Video Games Corporation has forecasted the following monthly sales:
  January$98,000    July$43,000  
  February 91,000    August 43,000  
  March 23,000    September 53,000  
  April 23,000    October 83,000  
  May 18,000    November 103,000  
  June 33,000    December 121,000  
Total annual sales = $732,000
Bombs Away Video Games Corporation
Production and inventory schedule in units
 Beginning inventory+ProductionSales=Ending inventory
  January23,000         
  February     
  March     
  April     
  May     
  June     
  July     
  August     
  September     
  October     
  November     
  December     

Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for $5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.

Of each month’s sales, 40 percent are for cash and 60 percent are on account. All accounts receivable are collected in the month after the sale is made.

a.Construct a monthly production and inventory schedule in units. Beginning inventory in January is 23,000 units.
b.Prepare a monthly schedule of cash receipts. Sales in December before the planning year are $100,000.
Bombs Away Video Games Corporation
Cash Receipts Schedule
 January February March April May June
  Sales     $   
      
  Cash receipts:           
  Cash sales     $   
  Prior month’s credit sales       
      
  Total cash receipts     $   
      
Bombs Away Video Games Corporation
Cash Receipts Schedule
 July August September October November December
  Sales     $   
      
  Cash receipts:           
  Cash sales     $   
  Prior month’s credit sales       
      
  Total cash receipts     $   
      
Prepare a cash payments schedule for January through December. The production costs of $2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $43,000 per month.
Bombs Away Video Games Corporation
Cash Payments Schedule
Constant production
 January February March April May June
  Production cost     $   
  Other cash payments       
      
  Total cash payments     $   
Bombs Away Video Games Corporation
Cash Payments Schedule
Constant production
 July August September October November December
  Production cost     $   
  Other cash payments       
      
  Total cash payments     $   
      

2.

Guardian Inc. is trying to develop an asset-financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 25 percent. (Do not round intermediate calculations. Round your answers to the nearest whole number.)

Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 60 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 13 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan.

Annual Interest
  Conservative$   
  Aggressive

Given that Guardian’s earnings before interest and taxes are $280,000, calculate earnings after taxes for each of your alternatives.

Earnings After Taxes
  Conservative$   
  Aggressive$   

What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?

ConservativeAggressive
  Total interest$   $   
  Earnings after taxes$   $   

3.

Biochemical Corp. requires $740,000 in financing over the next three years. The firm can borrow the funds for three years at 12.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 9.25 percent interest in the first year, 13.50 percent interest in the second year, and 10.50 percent interest in the third year. Assume interest is paid in full at the end of each year.

Determine the total interest cost under each plan.

Interest Cost
  Long-term fixed-rate$     
  Short-term variable-rate$     

Which plan is less costly?

Long-term fixed-rate plan

Short-term variable-rate plan

4.

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

 January$8,100    April$8,100    
  February 2,100    May 9,100    
  March 3,100    June 4,100    

Short-term financing will be utilized for the next six months. Projected annual interest rates are:

     
  January5%   April12
  February6    May12 
  March9    June12 

What long-term interest rate would represent a break-even point between using short-term financing and long-term financing? (Round the monthly interest rate to 2 decimal places when expressed as a percent (e.g., .67%) and use this rounded rate to compute the monthly interest.  Round the monthly interest to the nearest whole cent. Use the rounded monthly interest amounts to compute the total interest for the 6-month period. Input your answer as a percent rounded to 2 decimal places.)

  Interest rate %  

5.

Assume that Hogan Surgical Instruments Co. has $2,700,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan, the return will be 11 percent. If the firm goes with a short-term financing plan, the financing costs on the $2,700,000 will be 7 percent, and with a long-term financing plan, the financing costs on the $2,700,000 will be 9 percent.

Compute the anticipated return after financing costs with the most aggressive asset-financing mix.Anticipated return$   

Compute the anticipated return after financing costs with the most conservative asset-financing mix.

  Anticipated return$   

Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix

Anticipated Return
  Low liquidity$       
  High liquidity$       

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