Bombs away video games corporation

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

+

Production

–

Sales

=

Ending inventory

  January

23,000

  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?

Conservative

Aggressive

  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:

  January

5

%

   April

12

%

  February

6

   May

12

  March

9

   June

12

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

$