Corporate Finance

1.Problem 4-1 Growth and financing [LO4]

Philip Morris is excited because sales for his clothing company are expected to double from $650,000 to $1,300,000 next year. Philip notes that net assets (Assets – Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 12 percent return on total sales. He will start the year with $250,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take.

 

(a)	Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

 

Ending cash balance

$ [removed]

 

(b)	Does his optimistic outlook for his cash position appear to be correct?

2.Problem 4-3 Growth and financing [LO4]

Galehouse Gas Stations, Inc., expects sales to increase from $1,710,000 to $1,910,000 next year. Mr. Galehouse believes that net assets (Assets – Liabilities) will represent 45 percent of sales. His firm has a 8 percent return on sales and pays 20 percent of profits out as dividends.

 

(a)	What effect will this growth have on funds? (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

 

The cash balance will change by $ [removed].

 

(b)	If the dividend payout is only 15 percent, what effect will this growth have on funds? (Omit the “$” sign in your response.)

 

The cash balance will change by $ [removed].

 

3.Problem 4-4 Sales projections [LO2]

The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated.

 

Outcome	Probability	Units	Price
A	.30	260	$	27
B	.50	440		42
C	.20	650		52

 

What is the expected value of the total sales projection? (Omit the “$” sign in your response.)

 

Total expected value

$ [removed]

 

4.Problem 4-6 Sales projections [LO2]

Cyber Security Systems had sales of 3,200 units at $60 per unit last year. The marketing manager projects a 15 percent increase in unit volume sales this year with a 40 percent price increase. Returned merchandise will represent 5 percent of total sales.

 

What is your net dollar sales projection for this year? (Omit the “$” sign in your response.)

 

Net sales

 

5.Problem 4-8 Production requirements [LO2]

Sales for Western Boot Stores are expected to be 49,000 units for October. The company likes to maintain 25 percent of unit sales for each month in ending inventory (i.e., the end of October). Beginning inventory for October is 13,000 units.

 

How many units should Western Boot produce for the coming month?

 

Units to be produced

 

6.Problem 4-11 Cost of goods sold-FIFO [LO2]

On December 31 of last year, Wolfson Corporation had in inventory 560 units of its product, which cost $18 per unit to produce. During January, the company produced 960 units at a cost of $21 per unit.

 

Assuming that Wolfson Corporation sold 1,020 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? (Omit the “$” sign in your response.)

 

Cost of goods sold

$ [removed]

 

7.Problem 4-13 Cost of goods sold-LIFO and FIFO [LO2]

At the end of January, Mineral Labs had an inventory of 925 units, which cost $9 per unit to produce. During February the company produced 1,650 units at a cost of $13 per unit.

 

(a)	If the firm sold 2,350 units in February, what was the cost of goods sold? (Assume LIFO inventory accounting.) (Omit the “$” sign in your response.)

 

Cost of goods sold

 

(b)	If the firm sold 2,350 units in February, what was the cost of goods sold? (Assume FIFO inventory accounting.) (Omit the “$” sign in your response.)

 

Cost of goods sold

 

8.Problem 4-14 Gross profit and ending inventory [LO2]

The Bradley Corporation produces a product with the following costs as of July 1, 2011:

 

Material	$ 4 per unit
Labor	2 per unit
Overhead	2 per unit

 

Beginning inventory at these costs on July 1 was 3,650 units. From July 1 to December 1, 2011, Bradley produced 13,300 units. These units had a material cost of $2, labor of $4, and overhead of $2 per unit. Bradley uses FIFO inventory accounting.

 

(a)	Assuming that Bradley sold 14,300 units during the last six months of the year at $13 each, what would gross profit be? (Omit the “$” sign in your response.)

 

Gross profit

$ [removed]

 

(b)	What is the value of ending inventory? (Omit the “$” sign in your response.)

 

Ending inventory

$ [removed]

9.Problem 4-15 Gross profit and ending inventory [LO2]

The Bradley Corporation produces a product with the following costs as of July 1, 2011:

 

Material	$ 4 per unit
Labor	4 per unit
Overhead	2 per unit

 

Beginning inventory at these costs on July 1 was 3,750 units. From July 1 to December 1, 2011, Bradley produced 13,500 units. These units had a material cost of $4, labor of $6, and overhead of $3 per unit. Bradley uses LIFO inventory accounting.

 

(a)	Assuming that Bradley sold 16,000 units during the last six months of the year at $18 each, what would gross profit be? (Omit the “$” sign in your response.)

 

Gross profit

$ [removed]

 

(b)	What is the value of ending inventory? (Omit the “$” sign in your response.)

 

Ending inventory	$ [removed]

 

10.Problem 4-19 Schedule of cash receipts [LO2]

Watt’s Lighting Stores made the following sales projections for the next six months. All sales are credit sales.

 

March	$	48,000	June	$ 52,000
April		54,000	July	60,000
May		43,000	August	62,000

 

Sales in January and February were $51,000 and $50,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 35 percent are collected in the month of sale, 45 percent are collected in the following month, and 10 percent are collected two months after sale.

 

(a)	Prepare a monthly cash receipts schedule for the firm for March through August. (Omit the “$” sign in your response.)

 

 

(b)	Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is expected to be collected later? (Omit the “$” sign in your response.)