WEEK 3
Chapter 4
Questions
1)
The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the
associated financing that will be required. Furthermore, one can track actual events against the projections. Bankers and other lenders
also use these financial statements as a guide in credit decisions.
5)
Considering sustainable growth rates, one can envision situations where a firm with moderate profitability (say ROE = 8%)
grows much quicker (say sales growth of 30% per year). With no access to outside equity funding the growth in the firm’s debt ratios
required to support the sales growth might alarm lenders so that they are unwilling to advance more funds and may demand repayment
of the existing loans. Growing faster than the internally sustainable growth rate is not a good strategy for firms whose return on
investment prospects is less than other comparable investments. Incremental profits from sales expansion seldom meet new financing
needs.
Problem
4)
Eli Lilly
Beginning cash
− Asset buildup
Profit
Ending cash
$120,000
(320,000) (1/2 × $640,000)
96,000 (8% × $1,200,000)
($104,000) Deficit
No. Cash will be in a deficit.
10)
Ross Pro’s Sports Equipment
+ Projected sales......................
4,800 units
+ Desired ending inventory.....
480 (10%  4,800)
− Beginning inventory.............
Units to be produced................
4-23.
Ed’s Waterbeds
Cash Receipts Schedule
January February
Sales
Collections(30%
of current sales)
300
4,980
March
April
$13,500 $13,000 $12,000 $16,000
May
$10,000
June
July
$14,000 $17,000
August
$18,000
3,600
4,800
3,000
4,200
5,100
5,400
Collections(40%
of prior month's
sales)
5,200
4,800
6,400
4,000
5,600
6,800
Collections(20%
of sales 2
months earlier)
2,700
2,600
2,400
3,200
2,000
2,800
$11,500 $12,200
$11,800
$11,400 $12,700
$15,000
Total cash
receipts
Still due (uncollected) in August:
Bad debts: ($12,000 +16,000 +10,000 +14,000 +17,000 +18,000)  10% = (87,000)  10% = $8,700
To be collected from July sales: ($17,000  .20) = $3,400
To be collected from August sales: ($18,000  .60) = $10,800
$8,700 +$3,400 + $10,800 = $22,900 due
Expected to be collected: $22,900 due − $8,700 bad debts = $14,200