CASH FLOW AND FINANCIAL PLANNING

P4-5. LG 2: Classifying inflows and outflows of cash Basic Item Change ($) I/O O O I O O O Item Accounts receivable Net profits Change ($) 700 600 I/O I I I O O I

Cash 100 Accounts 1,000 payable Notes payable 500 Long-term debt 2,000 Inventory 200 Fixed assets 400 P4-6.

Depreciation 100 Repurchase of stock 600 Cash dividends 800 Sale of stock 1,000

LG 2: Finding operating and free cash flows Intermediate a. Cash flow from operations net profits after taxes depreciation Cash flow from operations $1,400 1,600 Cash flow from operations $3,000 b. NOPAT EBIT (1 t) NOPAT $2,700 (1 0.40) $1,620 c. OCF EBIT taxes depreciation OCF $2,700 $933 $1,600 OCF $3,367

d. FCF OCF net fixed asset investment* net current asset investment** FCF $3,367 $1,400 $1,400 FCF $567
Net fixed asset investment change in net fixed assets depreciation Net fixed asset investment ($14,800 $15,000) ($14,700 $13,100) Net fixed asset investment $200 $1,600 $1,400 ** Net current asset investment change in current assets change in (accounts payable and accruals) Net current asset investment ($8,200 $6,800) ($100 $100) Net current asset investment $1,400 0 $1,400 *

e.

Keith Corporation has positive cash flows from operating activities. The accounting cash flows are a little less than the operating and free cash flows (FCF). The FCF value is very meaningful since it shows that the cash flows from operations are adequate to cover both operating expense plus investment in fixed and current assets.

P4-9.

LG 4: Cash budgetbasic Intermediate March Sales Cash sales (0.20) Lag 1 month (0.60) Lag 2 months (0.20) Other income Total cash receipts Disbursements Purchases Rent Wages & salaries Dividends Principal & interest Purchase of new equipment Taxes due Total cash disbursements Total cash receipts Total cash disbursements Net cash flow Add: Beginning cash Ending cash Minimum cash Required total financing (notes payable) Excess cash balance (marketable securities) $50,000 $10,000 April $60,000 $12,000 May $70,000 $14,000 36,000 10,000 2,000 $62,000 $50,000 3,000 6,000 June $80,000 $16,000 42,000 12,000 2,000 $72,000 $70,000 3,000 7,000 3,000 4,000 6,000 $93,000 $72,000 93,000 ($21,000) 8,000 ($13,000) 5,000 $18,000 $ 3,000 0 July $100,000 $ 20,000 48,000 14,000 2,000 $ 84,000 $ 80,000 3,000 8,000

6,000 $59,000 $62,000 59,000 $ 3,000 5,000 $ 8,000 5,000 $97,000 $84,000 97,000 ($13,000) (13,000) ($26,000) 5,000 $31,000 0

The firm should establish a credit line of at least $31,000. P4-15. LG 5: Pro forma income statement Intermediate a. Pro Forma Income Statement Metroline Manufacturing, Inc. for the Year Ended December 31, 2010 (percent-of-sales method) Sales Less: Cost of goods sold (0.65 sales) Gross profits Less: Operating expenses (0.086 sales) Operating profits Less: Interest expense $1,500,000 975,000 $ 525,000 129,000 $ 396,000 35,000

Net profits before taxes Less: Taxes (0.40 NPBT) Net profits after taxes Less: Cash dividends To retained earnings b.

$ 361,000 144,400 $ 216,600 70,000 $ 146,600

Pro Forma Income Statement Metroline Manufacturing, Inc. for the Year Ended December 31, 2010 (based on fixed and variable cost data) Sales Less: Cost of goods sold Fixed cost Variable cost (0.50 sales) Gross profits Less: Operating expense: Fixed expense Variable expense (0.06 sales) Operating profits Less: Interest expense Net profits before taxes Less: Taxes (0.40 NPBT) Net profits after taxes Less: Cash dividends To retained earnings $1,500,000 210,000 750,000 $ 540,000 36,000 90,000 414,000 35,000 379,000 151,600 227,400 70,000 157,400

$ $ $ $

c. The pro forma income statement developed using the fixed and variable cost data projects a higher net profit after taxes due to lower cost of goods sold and operating expenses. Although the percent-of-sales method projects a more conservative estimate of net profit after taxes, the pro forma income statement that classifies fixed and variable cost is more accurate.

P4-18. LG 5: Pro forma balance sheet Intermediate a. Pro Forma Balance Sheet Peabody & Peabody December 31, 2011 Assets Current assets Cash Marketable securities Accounts receivable Inventories Total current assets Net fixed assets Total assets Liabilities and stockholders equity Current liabilities Accounts payable Accruals Other current liabilities Total current liabilities Long-term debts Total liabilities Common equity External funds required Total liabilities and stockholders equity
1

$ 480,000 200,000 1,440,000 2,160,000 $4,280,000 4,820,0001 $9,100,000

$1,680,000 500,000 80,000 $2,260,000 2,000,000 $4,260,000 4,065,0002 775,000 $9,100,000

$4,000,000 1,500,000 (680,000) $ 4,820,000

Beginning gross fixed assets (January 1, 2011) Plus: Fixed asset outlays Less: Depreciation expense Ending net fixed assets (December 31, 2011)

Note: Common equity is the sum of common stock and retained earnings. Beginning common equity (January 1, 2010) Plus: Net profits after taxes (2010) Net profits after taxes (2011) Less: Dividends paid (2010) Dividends paid (2011) Ending common equity (December 31, 2011) $3,720,000 330,000 360,000 (165,000) (180,000) $4,065,000

b. Peabody & Peabody must arrange for additional financing of at least $775,000 over the next two years based on the given constraints and projections.