ANALYSIS FOR FINANCIAL MANAGEMENT

10th Edition
Robert C. Higgins
Additional Problems
Chapter 3
1. Below are 2010 financial statements for Baltimore Beverages Co. Also appearing are managements projections of
how individual items in their financial statements will vary in the future. The company expects sales to grow 10% next
year. Baltimore Beverages finances all of its needs with 10-year long-term debt at 10% interest, while any excess cash at
the end of the year is added to the cash balance.
a. Prepare a spreadsheet to estimate Baltimore Beverage's 2011 need for external funding assuming long-term debt and
interest expense remain at their 2010 levels.
b. Modify your spreadsheet forecast in part (a) to capture the interdependence between the loan and interest expense.
That is, switch your computer to "manual calculation" and include the necessary loan and added interest expense in
your forecast.
c. Is the required loan in part (b) equal to the required loan you calculated in part (a)? Why are they different?
d. Perform a sensitivity analysis of Baltimore Beverages Co.s external financing needs as determined in part (b).
Assume sales grow at 15% instead of 10%. How much does the bank loan increase as sales go from 10% to 15%?
e. Perform a scenario analysis on the companys projection as determined in part (b). Assume sales grow 20%, the
cost of goods sold is 32% of sales, and accounts receivable fall from 13% of sales to 11%. What happens to the loan
need in this scenario relative to your answer in part (b)?
f. Return now to the original assumptions and extend your projections in part (b) through 2015. Continue to assume
that all external funding needs will be met with debt at 10% interest and any excess cash will add to the companys
cash balance. What are your projected values for long-term debt and cash and equivalents in 2015?
g. Perform a scenario analysis on your 5-year projection in part (f). Assume growth in sales is 8%, the cost of goods
sold is 40% of sales, and selling, general and administrative expenses are 52% of sales. What are your projected
values for long-term debt and cash balance in 2015?
Q2 This problem asks you to construct a simple simulation model. If you do not own simulation software, you can
download to your computer a free, full-strength version of Crystal Ball for a one-week trial. Point your browser to
www.crystalball.com and select download.
Question 1 presented 2010 financial statements and management projections for Baltimore Beverages Company.
Construct a simulation model of the companys long-term debt needs in 2012. Use the "base case" model in part (b)
of question 1 as your starting point. Model the 2012 projected sales growth as a normal distribution with a mean value
of 12 percent and a standard deviation of 3.5 percent. Prepare a frequency chart of external funds required. If the
treasurer wants to be 95 percent certain of being able to raise enough money next year, how much should he be
prepared to raise? (Hint: grab the right triangle below the frequency chart and move it to the left until 95.00 appears in
the Certainty window.)
Baltimore Beverages Co.
Income Statement (in $ millions)

2010
Sales
Cost of Goods Sold

Assumptions

$ 186.783
75.123

10%
38%

growth in sales
percentage of sales

Gross Profit
Selling, General, & Administrative Exp.

111.660
93.653

50%

percentage of sales

Operating Income Before Deprec.

Depreciation,Depletion,&Amortization

18.007
7.658

30%

percentage of net PP&E

Operating Profit
Interest Expense

10.349
5.330

initially constant

5.019
2.008

40%

Pretax Income
Total Income Taxes
Net income

3.011

percentage of earnings before taxes

Balance Sheet (in $ millions)

2010
ASSETS
Cash & Equivalents
Account Receivable
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets

2.130
25.219
13.323
2.925
8.253
51.850

2%
13%
5%
no change
6%

minimum cash balance as percentage of sales

percentage of sales
percentage of sales

Net Plant, Property & Equipment

Intangibles
Other Assets
TOTAL ASSETS

27.897
3.377
9.059
$ 92.183

15%
no change
5%

percentage of sales

LIABILITIES
Accounts Payable
Accrued Expenses
Other Current Liabilities
Total Current Liabilities

$ 12.201
10.664
1.253
24.118

6%
5%
no change

percentage of sales
percentage of sales

percentage of sales

percentage of sales

Long Term Debt

Accrued wages
Total Liabilities

53.306
7.919
85.343

initially constant
3%

EQUITY
Common Stock
Capital Surplus
Retained Earnings
Less: Treasury Stock

0.605
20.398
40.909
55.072

no change
no change
no dividends paid so all income is retained
no change

TOTAL EQUITY
TOTAL LIABILITIES & EQUITY

6.840
$ 92.183

percentage of sales

as percentage of sales