Posted: December 20th, 2021

P4–5 Classifying inflows and outflows of cash -P4-5 P4-6 P4-9 P4-15 P4-18P5-2 P5-6 P5-14 P5-22 P5

P4–5 Classifying inflows and outflows of cash Classify each of the
following items as an
inflow (I) or an outflow (O) of cash, or as neither (N).
LG 2
LG 2
Item Change ($) Item Change ($)
Cash +100 Accounts receivable ?700
Accounts payable ?1,000 Net profits +600
Notes payable +500 Depreciation +100
Long-term debt ?2,000 Repurchase of stock +600
Inventory +200 Cash dividends +800
Fixed assets +400 Sale of stock +1,000

P4–6 Finding operating and free cash flows Consider the following
balance sheets and
selected data from the income statement of Keith Corporation.
December 31
Assets 2015 2014
Cash $ 1,500 $ 1,000
Marketable securities 1,800 1,200
Accounts receivable 2,000 1,800
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $29,500 $28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $14,800 $15,000
Total assets $23,000 $21,800
Liabilities and stockholders’ equity
Accounts payable $ 1,600 $ 1,500
Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $10,000 $10,000
Retained earnings 3,400 2,800
Total stockholders’ equity $13,400 $12,800
Total liabilities and stockholders’ equity $23,000 $21,800
Keith Corporation Balance Sheets
ISBN 1Depreciation
expense $1,600
Earnings
before interest and taxes (EBIT) 2,700
Interest
expense 367
Net
profits after taxes 1,400
Tax
rate 40%

a.
Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended
December
31, 2015, using Equation 4.1.
b.
Calculate the firm’s operating cash flow (OCF) for the year ended December 31,
2015,
using Equation 4.3.
c.
Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2015,
using
Equation 4.4.
d.
Interpret, compare, and contrast your cash flow estimates in parts b and c.

P4–9
Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and
$60,000
in April. Forecast sales for May, June, and July are $70,000, $80,000, and
$100,000,
respectively. The firm has a cash balance of $5,000 on May 1 and wishes
to
maintain a minimum cash balance of $5,000. Given the following data, prepare
and
interpret a cash budget for the months of May, June, and July.
(1)
The firm makes 20% of sales for cash, 60% are collected in the next month,
and
the remaining 20% are collected in the second month following sale.
LG
4
LG
4
Depreciation
expense $1,600
Earnings
before interest and taxes (EBIT) 2,700
Interest
expense 367
Net
profits after taxes 1,400
Tax
rate 40%
Keith
Corporation Income Statement Data (2015)
LG
4
ISBN
1-269-86847-0
Principles
of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.
Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
152
PART 2 Financial Tools
(2)
The firm receives other income of $2,000 per month.
(3)
The firm’s actual or expected purchases, all made for cash, are $50,000,
$70,000,
and $80,000 for the months of May through July, respectively.
(4)
Rent is $3,000 per month.
(5)
Wages and salaries are 10% of the previous month’s sales.
(6)
Cash dividends of $3,000 will be paid in June.
(7)
Payment of principal and interest of $4,000 is due in June.
(8)
A cash purchase of equipment costing $6,000 is scheduled in July.
(9)
Taxes of $6,000 are due in June.

P4–15
Pro forma income statement The marketing department of Metroline Manufacturing
estimates
that its sales in 2016 will be $1.5 million. Interest expense is expected
to
remain unchanged at $35,000, and the firm plans to pay $70,000 in cash
dividends
during
2016. Metroline Manufacturing’s income statement for the year ended
December
31, 2015, and a breakdown of the firm’s cost of goods sold and operating
expenses
into their fixed and variable components are given below.
a.
Use the percent-of-sales method to prepare a pro forma income statement for the
year
ended December 31, 2016.
b.
Use fixed and variable cost data to develop a pro forma income statement for
the
year
ended December 31, 2016.
c.
Compare and contrast the statements developed in parts a and b. Which statement
probably
provides the better estimate of 2016 income? Explain why.
ISBN
1-269-86847-0
Principles
of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.
Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.

P4–18
Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It
wishes
to analyze expected performance and financing needs for 2017, which is
2
years ahead. Given the following information, respond to parts a and b.
(1)
The percents of sales for items that vary directly with sales are as follows:
Accounts
receivable, 12%
Inventory,
18%
Accounts
payable, 14%
Net
profit margin, 3%
(2)
Marketable securities and other current liabilities are expected to remain
unchanged.

(3)
A minimum cash balance of $480,000 is desired.
(4)
A new machine costing $650,000 will be acquired in 2016, and equipment
costing
$850,000 will be purchased in 2017. Total depreciation in 2016 is
forecast
as $290,000, and in 2017 $390,000 of depreciation will be taken.
(5)
Accruals are expected to rise to $500,000 by the end of 2017.
(6)
No sale or retirement of long-term debt is expected.
(7)
No sale or repurchase of common stock is expected.
(8)
The dividend payout of 50% of net profits is expected to continue.
(9)
Sales are expected to be $11 million in 2016 and $12 million in 2017.
(10)
The December 31, 2015, balance sheet follows.

Assets
Liabilities and stockholders’ equity
Cash
$ 400 Accounts payable $1,400
Marketable
securities 200 Accruals 400
Accounts
receivable 1,200 Other current liabilities 80
Inventories
1,800 Total current liabilities $1,880
Total
current assets $3,600 Long-term debt 2,000
Net
fixed assets 4,000 Total liabilities 3,880
Total
assets $7,600 Common equity 3,720
Total
liabilities and
stockholders’
equity $7,600
Peabody
& Peabody Balance Sheet December 31, 2015 ($000)
a.
Prepare a pro forma balance sheet dated December 31, 2017.
b.
Discuss the financing changes suggested by the statement prepared in part a.

P5–2
Future value calculation Without referring to the preprogrammed function on
your
financial
calculator, use the basic formula for future value along with the given
interest
rate,
r, and the number of periods, n, to calculate the future value of $1 in
each
of the cases shown in the following table.

Case
Interest rate, r Number of periods, n
A
12% 2
B
6 3
C
9 2
D
3 4

P5–6
Time value As part of your financial planning, you wish to purchase a new car
exactly
5
years from today. The car you wish to purchase costs $14,000 today, and
your
research indicates that its price will increase by 2% to 4% per year over the
next
5 years.
a.
Estimate the price of the car at the end of 5 years if inflation is (1) 2% per
year
and
(2) 4% per year.
b.
How much more expensive will the car be if the rate of inflation is 4% rather
than
2%?
c.
Estimate the price of the car if inflation is 2% for the next 2 years and 4%
for
3
years after that.

P5–14
Time value An Iowa state savings bond can be converted to $100 at maturity
6
years from purchase. If the state bonds are to be competitive with U.S. savings
bonds,
which pay 8% annual interest (compounded annually), at what price
must
the state sell its bonds? Assume no cash payments on savings bonds prior
to
redemption.

P5–22
Retirement planning Hal Thomas, a 25-year-old college graduate, wishes to
retire at
age
65. To supplement other sources of retirement income, he can deposit $2,000
each
year into a tax-deferred individual retirement arrangement (IRA). The IRA will
earn
a 10% return over the next 40 years.
a.
If Hal makes annual end-of-year $2,000 deposits into the IRA, how much will he
have
accumulated by the end of his sixty-fifth year?
b.
If Hal decides to wait until age 35 to begin making annual end-of-year $2,000
deposits
into the IRA, how much will he have accumulated by the end of his
sixty-fifth
year?
c.
Using your findings in parts a and b, discuss the impact of delaying making
deposits
into
the IRA for 10 years (age 25 to age 35) on the amount accumulated
by
the end of Hal’s sixty-fifth year.
d.
Rework parts a, b, and c, assuming that Hal makes all deposits at the
beginning,
rather
than the end, of each year. Discuss the effect of beginning-of-year deposits
on
the future value accumulated by the end of Hal’s sixty-fifth year.

P5-29
Value of a single amount versus a mixed stream Gina Vitale has just contracted
to
sell a small parcel of land that she inherited a few years ago. The buyer is
willing to
pay
$24,000 at the closing of the transaction or will pay the amounts shown in the
following
table at the beginning of each of the next 5 years. Because Gina doesn’t
really
need the money today, she plans to let it accumulate in an account that earns
7%
annual interest. Given her desire to buy a house at the end of 5 years after
closing
on
the sale of the lot, she decides to choose the payment alternative—$24,000
single
amount
or the mixed stream of payments in the following table—that provides the
higher
future value at the end of 5 years. Which alternative will she choose?
Mixed
stream
Beginning
of year Cash flow
1
$ 2,000
2
4,000
3
6,000
4
8,000
5
10,000

P5–39
Compounding frequency and time value You plan to invest $2,000 in an individual
retirement
arrangement (IRA) today at a nominal annual rate of 8%, which is expected
to
apply to all future years.
LG
5
LG
5
LG
5
LG
5
ISBN
1-269-86847-0
Principles
of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J.
Zutter. Published by Prentice Hall. Copyright © 2015 by Pearson Education, Inc.
214
PART 2 Financial Tools
a.
How much will you have in the account at the end of 10 years if interest is
compounded
(1)
annually, (2) semiannually, (3) daily (assume a 365-day year), and
(4)
continuously?
b.
What is the effective annual rate (EAR) for each compounding period in part a?
c.
How much greater will your IRA balance be at the end of 10 years if interest is
compounded
continuously rather than annually?
d.
How does the compounding frequency affect the future value and effective annual
rate
for a given deposit? Explain in terms of your findings in parts a through c.

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