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December January February
Cash Receipts:
Receipts from sales $160,000 $40,000
Cash Disbursements:
Payments for purchases 40,000 40,000
Net cash flow for the month $113,200 $( 6,800)
8-16 a. (1) Determine the variable cost per unit at present, using the following definitions and
equations:
Q = units of output (sales) = 5,000.
P = average sales price per unit of output = $100.
(2) Determine the new EBIT level if the change is made:
(3) Determine the incremental EBIT:
ΔEBIT = $135,000 – $50,000 = $85,000.
(4) Estimate the approximate rate of return on the new investment:
21.25%0.2125
$400,000
$85,000
Investment
ΔEBIT
ΔROA ====
Because the ROA exceeds Olinde’s average cost of funds, this analysis suggests that
Olinde should go ahead and make the investment.
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b.
FV)Q(P
V)Q(P
DOL −−
−
=
units 4,000
$50$100
$200,000
VP
F
Q
OpBE
=
−
=
−
=
:Old
8-17 a. Carol’s Fashion Designs, Inc.
Cash Budget, July-December 2016
I. Collections and Payments:
May June July August September October November December
Credit Sales $180,000 $180,000 $360,000 $540,000 $720,000 $360,000 $360,000 $ 90,000
Labor/Materials 90,000 90,000 126,000 882,000 306,000 234,000 162,000 90,000
Cash Receipts:
From this month’s sales (10%) 36,000 54,000 72,000 36,000 36,000 9,000
Cash Disbursements:
Labor/raw materials (1 month lag) 90,000 126,000 882,000 306,000 234,000 162,000
Administrative salaries 27,000 27,000 27,000 27,000 27,000 27,000
Lease payment 9,000 9,000 9,000 9,000 9,000 9,000
b. The cash budget indicates that Carol will have surplus funds available during July, August,
c. In a situation such as this, where inflows and outflows are not synchronized during the month, it
might not be possible to use a cash budget centered on the end of the month. The cash budget
7/2 7/4 7/5 7/6 7/14 7/30
Beginning cash balance $132,000 $132,000 $132,000 $132,000 $132,000 $132,000
Cumulative inflows
[1/30xreceiptsx(# days)] 13,200 26,400 33,000 39,600 92,400 198,000
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8-18 Integrative Problem
PART I
a. Income Statement:
2016 Forecast
2015 Forecast Feed-
Actual Basis 1st Pass Back 2nd Pass
Sales $2,000.00 1.25 $2,500.00 $2,500.00
Less: Var. costs (60%) (1,200.00) 1.25 (1,500.00) 1,500.00
Balance Sheet: 2016 Forecast
2015 Forecast Feed-
Actual Basis 1st Pass Back 2nd Pass
Cash & securities $ 20.00 1.25 $ 25.00 $ 25.00
Accounts receivable 240.00 1.25 300.00 300.00
A/P and accruals $ 100.00 1.25 $ 125.00 $ 125.00
Notes payable 100.00 100.00 +89.61a 189.61
Total current liab. $ 200.00 $ 225.00 $ 314.61
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b. Key ratios NWC
2015 2016 Industry
Actual 2nd pass 2015
Profit margin 2.52% 2.27% 4.00%
ROE 7.20% 7.68% 15.60%
Days sales outstanding (DSO) 43.20 days 43.20 days 32.00 days
c. (1)
667,2$
75.0
000,2$
operated were assets fixed
which at capacity of Percent
sales Actual
sales
capacity Full ==
=
(2) We had previously found an AFN of $185.24 using two passes through the balance sheet
d. We would expect almost all the ratios to improve. With less financing, interest expense would
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Without question, the company’s financial position would be better. One cannot tell exactly how
large the improvement will be without working out the numbers, but when we worked them out
(with a spreadsheet model that requires just one change, a change in capacity utilization from
100 percent to 75 percent), we obtained the following figures:
2016, 2nd Pass
2015 If 2015 Was At
Key Ratios Actual 75% Cap. 100% Cap.
Profit Margin 2.52% 2.51% 2.27%
Roe 7.20% 8.44% 7.68%
e. The DSO and inventory turnover ratio indicate that NWC has excessive inventories and
receivables. The effect of improvements here would be similar to that associated with excess
capacity in fixed assets. Sales could be expanded without proportionate increases in current
f. (1) If the payout ratio were reduced, then more earnings would be retained, and this would
reduce the need for external financing, or AFN.
PART II
a. The computation for operating breakeven is:
units million 15
0.6)–$10(1
million 60$
VP
F
QOpBE ==
−
=
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b. The breakeven chart is:
c. At 20 million units of sales, the operating section of NWC’s income statement would be:
Sales (20 million units @ $10) $200,000,000
Variable costs (60%, or $6) (120,000,000)
000,000,20$
EBIT
The DOL for this level of sales indicates that for every 1 percent change in sales, NOI, or EBIT,
will change by 4 percent. Therefore, if sales actually were 10 percent higher than expected,
EBIT would be 40 percent higher than expected. To show that this is correct, consider the what
the operating section of the income statement would look like if NWC’s sales actually were
$200,000,000(1.10) = $220,000,000:
Sales (22 million units @ $10) $220,000,000
d. At 20 million units of sales, the financing section of NWC’s income statement would be:
0
50
100
150
200
250
300
350
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Units (millions)
$ millions
QOpBE = 15
SOpBE = $150
Fixed costs
Total operating costs
Total sales revenues
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Net operating income (EBIT) $20,000,000
Interest (16,000,000)
e. Breakeven analysis can be used to help determine the feasibility of the proposal. As the above
analyses show, NWC would have to sell at least 15 million units of the chemical before the
expected. To see this, the income statement for sales units equal to 19 million = 20 million x
0.95 is given below:
Sales (19 million units @ $10) $190,000,000
8-19 Computer-Related Problem
a.
INPUT DATA: KEY OUTPUT:
Forecasted sales growth:
2016 15.0% 2016 AFN $7.0
Cumulative AFN $49.8
AFN financing percentages:
Notes payable 50.0%
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Dividend payout ratio 40.0%
MODEL-GENERATED DATA:
INCOME STATEMENT
(IN MILLIONS)
Projected
Historical Initial Final Initial Final Initial Final Initial Final Initial Final
2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020
Sales 80.0 92.0 92.0 105.8 105.8 121.7 121.7 139.9 139.9 160.9 160.9
Operating costs (71.3) (82.0) (82.0) (94.3) (94.3) (108.4) (108.4) (124.7) (124.7) (143.4) (143.4)
BALANCE SHEET
Projected
Historical Initial Final Initial Final Initial Final Initial Final Initial Final
2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020
Cash 4.0 4.6 4.6 5.3 5.3 6.1 6.1 7.0 7.0 8.0 8.0
Accounts receivable 12.0 13.8 13.8 15.9 15.9 18.3 18.3 21.0 21.0 24.1 24.1
Inventories 16.0 18.4 18.4 21.2 21.2 24.3 24.3 28.0 28.0 32.2 32.2
Tot current assets 32.0 36.8 36.8 42.3 42.3 48.7 48.7 56.0 56.0 64.4 64.4
Initial Final Initial Final Initial Final Initial Final Initial Final
Additional Funds 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020
AFN 6.7 0.3 7.9 0.4 9.3 0.5 10.9 0.6 12.8 0.0
b. (1) growth = 20%
INPUT DATA: KEY OUTPUT:
Forecasted sales growth:
2016 20.0% 2016 AFN $10.2
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c. (2) dividend payout = 20%
INPUT DATA: KEY OUTPUT:
Forecasted sales growth:
2016 15.0% 2016 AFN $6.1
2017 15.0% 2017 AFN $7.2
AFN financing percentages:
Notes payable 50.0%
Long-term bonds 50.0% Ratios: 2015 2016 2017 2018 2019 2020
Common stock 0.0% Cur 2.5 2.1 1.9 1.7 1.6 1.5
ETHICAL DILEMMA
Competition-Based Planning—Promotion or Payoff?
Ethical dilemma:
Republic Communications Corporation (RCC) has offered you an attractive position in its financial planning
division. The new position would constitute a promotion with a $30,000 increase in salary compared to the
job you now have at National Telecommunications, Inc. (NTI). The problem is that RCC wants you to bring
the rate-setting software you developed at NTI, along with some rate data, with you to the new job. Even
though NTI sells its software to other companies and information concerning telephone rates is available to
the public, you know that such knowledge will help RCC significantly in its attempt to redesign its rate–
setting system. In fact, according to the situation presented in the text, a new and improved rate-setting
program could be worth as much as $200 million per year for RCC. Therefore, the question is whether the
information RCC wants you to take with you to your new job is proprietary to NTI. Should the rate-setting
program and the rate data be considered NTI’s privileged information?
Discussion questions:
• What is the ethical dilemma?
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Discussion can be generated by asking the students who they think owns NTI’s rate-setting program.
Does the program belong to the person who developed it, or does it belong to the company? In addition,
ask the students to indicate what information they believe ethically can be taken from one job to
another. Does it matter if the new job is with a company that is in direct competition with the company
you are leaving? Why?
• Should you take the new job? If so, should you take the rate-setting program and the rate data with you
to RCC?
It probably is easier to answer the second question first. The answer to this question is based on
whether the information actually is in the public domain—if it is, then there should not be a problem. For
public utilities that are regulated by states’ public utilities commissions, rate information is available
• What should RCC do?
References:
The situation presented here parallels a case involving American Airlines and Northwest Airlines. According
to a Wall Street Journal article, American alleged that Northwest attempted to steal fare-setting computer
programs by hiring top managers and those involved with computerized planning at significant salary
increases, and asking them to bring some of their work with them to their new jobs. It was after its attempts
to purchase the program from American were refused that Northwest began hiring American managers and
experts. One of the former American employees admitted that, before she left American for a position with
Northwest, she sent some information concerning American’s fare–setting and planning system to a top
manager at Northwest, who also formerly worked for American. American sued Northwest to bar the airline
from using its planning system and to recover financial damages. Northwest found the person who originally
wrote the equations used in American’s planning system; it was discovered that his concepts came from
public sources.
For more information concerning this situation, see the following article:
“Fare Game: Did Northwest Steal American’s Systems? The Court Will Decide,” The Wall Street Journal,