Garr Company estimates its investment to be $0.25 in assets for each dollar of new sales. By each dollar of additional sales$0.04 profits will be produced and $0.01 can be reinvested in the company. If sales rise by$400,000 the following year from their current level of $3.5 million and the ratio of spontaneous liabilities is 10 percent, what will be Garr Company’s need for discretionary financing? You need to estimate the changes in financing needs and match it with expected changes in spontaneous liabilities, retained earnings, and other sources of discretionary financing.

Sambonoza Enterprises projects its sales next year to be $4 million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections):

1. Current assets will equal 20 percent of sales, and fixed assets will remain at their current level of$1 million.
2. Common equity is currently $0.8 million, and the firm pays out half its after-tax earnings in dividends.
3. The firm has short-term payables and trade credit that normally equal 10 percent of sales, and it has no long-term debt outstanding.

What are Sambonoza’s financing requirements (i.e., total assets) and discretionary financing needs (DFN) for the coming year?

Door Company sells products in cash and in credit as follows: cash sales are 60 percent of total sales, and credit sales are 40 percent. 10 percent of the credit sales are collected in the month of the sale, 70 percent in the following month, and 20 percent two months after the sale. The total projected sales for January-April, 2017, are projected as follows:

Based on this information calculate

• a. Balance of accounts receivables for each month
• b. Cash collections for each month.

The balance of cash at the end of December 2016 is $300,000 and accounts receivables are$200,000. Assume that all accounts receivables from December.

Discuss the shortcomings of the percent of sales method of financial forecasting.

Star Supermarket made the following projections of sales for first six months of 2017:

The cost of goods sold is 60 percent of sales, purchases are all made in credit in previous month of sales. For instance, the inventories for January sales have been purchased in December, and the inventories for February in January. Ten percent of the payment to suppliers was made during the month of purchase, 60 percent in following month, and the remaining 30 percent two months after the purchase. For example, for January purchases, 10 percent will be paid in January, 60 percent in February, and 30 percent in March. Forty percent of sales were in cash, 60 percent on credit. Collections are made in the following two months, in equal parts. Besides these, Star has certain expenses that have to be paid on a monthly basis. Rent of warehouse is$20,000; the interest expense id $10,000; the sale’s commission is$50,000. Star company also expects to pay $25,000 at the end of March and$25,000 at the end of June as tax prepayments. Star Company tries to maintain a security balance, in cash, of $30,000. If this amount is below the figure mentioned, Star Supermarket can borrow at 12 percent annual rate. Assuming Star will need to repay any accrual interest in June, create the cash budget for January–June, 2017. The cash balance for January 1, 2017, is$45,000; the sales for November is $240,000, and in December the sales was$300,000. The expected sales in July is $350,000.

The Sharpe Corporation’s projected sales for the first 8 months of 2016 are shown in the corresponding table.

Of Sharpe’s sales, 10 percent is for cash, another 60 percent is collected in the month following the sales, and 30 percent is collected in the second month following sales. November and December sales for 2015 were$220,000 and $175,000, respectively. Sharpe purchases its raw materials 2 months in advance of its sales. The purchases are equal to 60 percent of the final sales price of Sharpe’s products. The supplier is paid 1 month after it makes a delivery. For example, purchases for April sales are made in February, and payment is made in March.

In addition, Sharpe pays$10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of$22,500 are made each quarter, beginning in March.

The company’s cash balance on December 31, 2015, was $22,000. This is the minimum balance the firm wants to maintain. Any borrowing that is needed to maintain this minimum is paid off in the subsequent month if there is sufficient cash. Interest on short-term loans (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus, if in the month of April the firm expects to have a need for an additional$60,500, these funds would be borrowed at the beginning of April with interest of $605 (0.12 * 1/12 *$60,500) owed for April and paid at the beginning of May.

• a. Prepare a cash budget for Sharpe covering the first 7 months of 2016.
• b. Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes?

Scion Company wants to plan inventories for the year 2017 based on average of the past 5 years data. Scion’s CEO, Radha Kar, believes that it is a good idea to use the average percent of sales forecasting method as sales and inventories increased in recent years. However, the company’s CFO Harry Beige is of another opinion. Harry wants to use the most recent percent of sales for inventory predictions.

The table has documented the inventory data, sales, and percentage sales.

• a. Plot the data for inventories and explain the type of relationship between inventories and sales.
• b. Calculate inventory levels with the 2 methods mentioned. Explain the differences, if any, and the reason why the differences occur. Scion Company expects $39 million in sales in 2017.

In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firm’s projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in Moline, Illinois, which is best known as the home of the John Deere Company. The CFO begins the process with the most recent year’s income statement, projects sales growth for the coming year, and then estimates net income and finally the additional earnings he can expect to retain and reinvest in the firm. The firm’s income statement for 2015 is shown. (in $000):

$$\begin{array}{c} \textbf{Income Statement (\$000)}\\ \textbf{YEAR ENDED DECEMBER 31, 2015}\\ \end{array}$$

$$\begin{array}{lrr} \text{Sales}&\$\hspace{10pt}\text{1,500}\hspace{4pt}\\ \text{Cost of goods sold}&\underline{\hspace{12pt}\text{(1,050)}}\\ \text{Gross profit}&\$\hspace{18pt}\text{450}\hspace{4pt}\\ \text{Operating costs}&\text{(225)}\\ \text{Depreciation expense}&\underline{\hspace{25pt}\text{(50)}}\\ \text{Net operating profit}&\$\hspace{18pt}\text{175}\hspace{4pt}\\ \text{Interest expense}&\underline{\hspace{25pt}\text{(10)}}\\ \text{Earnings before taxes}&\$\hspace{18pt}\text{165}\hspace{4pt}\\ \text{Taxes}&\underline{\hspace{25pt}\text{(58)}}\\ \text{Net income}&\underline{\underline{\$\hspace{18pt}\text{107\hspace{4pt}}}}\\ \text{Dividends}&\$\hspace{23pt}\text{20}\hspace{4pt}\\ \text{Addition to retained earnings}\hspace{10pt}&\$\hspace{23pt}\text{87}\hspace{4pt}\\ \end{array}$$

The electronics business has been growing rapidly over the past 18 months as the economy recovers, and the CFO estimates that sales will expand by 20 percent in the next year. In addition, he estimates the following relationships between each of the income statement expense items and sales:

$$\begin{array}{lrr} \text{COGS/sales}&\text{70\\\%}\\ \text{Operating expenses/sales}&\text{15\\\%}\\ \text{Depreciation expense (\$000)}\hspace{9pt}&\text{\$ 50}\hspace{9pt}\\ \text{Interest expense (\$000)}&\text{\$ 10}\hspace{9pt}\\ \text{Tax rate}&\text{35\\\%}\\ \end{array}$$

Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2015.

• a. Estimate Barker’s net income for 2016 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2015 level.
• b. Recalculate Barker’s net income and addition to retained earnings if sales grow at 40 percent over the coming year. However, this scenario requires the addition of new plant and equipment in the amount of $100,000, which increases annual depreciation to$58,000 per year, and interest expense rises to $15,000.

Aldagi Corporation is an insurance company, which operates in South Caucasus region. Since 2005, the company has increased its sales in the region and became a leader in health care, property-, and business-risk insurance. As of 2009, it started to build some hospitals and recently its subsidiary company is in charge of the management of three hospitals.

Highlights of Aldagi’s financial condition from 2009 to 2015 are found in the accompanying table.

Projected Sales for 2016-2020 are as follows:

To improve its capital condition, Aldagi issued preferred stocks in 2012 and continued to increase capital in the same way until 2015. This gave Aldagi a chance to repay part of its long-term borrowings in 2014 and 2015. From 2016, the corporation will not need any additional long-term borrowings, and the entire sum needs to be repaid from 2021. So, in 2016-2020 long-term debt will be constant. Due to financial and capital conditions, Aldagi did not pay any dividends, but it is currently planning to pay a dividend of$0.5 on each share—the outstanding shares (common and preferred) at the end of 2015 total to $500,000. From 2016 we can assume that Aldagi will pay$250,000 as dividend each year. Based on the information provided:

• a. Project net income for 2016–2020 using of sales method based on an average of this ration for 2009–2015.
• b. Project total assets and current liabilities for 2016–2020 using the percent of sales method and your sales projections from part (a).
• c. Calculate company’s discretionary financial needs for projected years.

Star Supermarket is evaluating its financial needs for the year 2017. The company’s CFO suggests that the relationship between sales, operating expenses, current liabilities, and total assets will remain at their current proportion of sales.

In 2016, Star had $3 million in sales and net income of$0.5 million. According to Star’s evaluation of the market and latest developments in the company’s successful sales strategy, it expects to increase sales to $4 million. Based on balance sheet from 2016, evaluate discretionary financing needs (DFN) for 2017.

Balance sheet as for December 31, 2016

$$\begin{array}{c} \hline\\ \textbf{\hspace{76pt}Star Supermarket\hspace{76pt}}\\ \textbf{BALANCE SHEET}\\ \end{array}$$

$$\begin{array}{llr} \hline\\ \hspace{95pt}{\textbf{ASSETS}}\\ \hspace{5pt}\text{Current assets}&&\$\text{\hspace{15pt}{410,000}}\\ \hspace{5pt}\text{Net fixed assets}\hspace{95pt}&&\text{\underline{\hspace{10pt}{1,150,000}}}\\ \text{Total}&&\underline{\underline{\$\hspace{5pt}\text{1,560,000}}}\\\\\hline \end{array}$$

$$\begin{array}{c} \textbf{LIABILITIES AND OWNERS’ EQUITY} \end{array}$$

$$\begin{array}{llr} \hspace{5pt}\text{Accounts payable }&&\$\hspace{13pt}\text{450,000}\\ \hspace{5pt}\text{Long-term debt}&&\underline{\text{\hspace{18pt}350,000}}\\ \text{Total liabilities}&&\text{\underline{\$\hspace{13pt}800,000}}\\ \hspace{5pt}\text{Common stock}&&\text{100,000}\\ \hspace{5pt}\text{Paid-in capital}&&\text{210,000}\\ \hspace{5pt}\text{Retained earnings}\hspace{82pt}&&\underline{\text{\hspace{18pt}450,000}}\\ \hspace{5pt}\text{Common equity}&&\underline{\text{\hspace{18pt}760,000}}\\ \text{Total}&&\underline{\underline{\$\hspace{6pt}\text{1,560,000}}}\\\\\hline \end{array}$$

Hotel Gudauri is operating in Georgia, South Caucasus, and is located in the Ski and Skate resort area. It became quite popular in recent years. Do you think that seasonal variations may affect forecasting of the hotel’s financial projections? How? Explain.

Identify leader whom you support, and describe what type of authority he or she has. Remember that leaders can be other students or community or family members.

You get paid on the first day of each month. You cash your check and pay all of your essential expenses. You keep the balance in your "discretionary spending" envelope. A scatter plot shows the number of days that have passed since you were paid and the amount left in your discretionary spending envelope. The explanatory x-variable is the number of days that have passed. The response y-variable is the amount left in your envelope. Is there a positive or negative correlation? Explain.

The goal of Confucianism is to create

1. democratic traditions
2. challenges to authority
3. a highly ordered society
4. economic interdependence