FIN 486
Document Sample
Following are the requirements and steps for the Week 3 assignment.
GRADING MATRIX
Possible Points Points Earned
1 Complete the 2006% of sales calculations. 2005 % of sales has been calculated as an example. 2
2 Answer this question: why is the % of sales for sales 100%? 1
We will now step through each assumption provided in the New Strategic Initiative Assumptions Memo (the original).
For each assumption, please indicate which line items on the income statement and balance sheet would be directly impacted by the assumption.
Line item reference numbers are provided in Column B of the historical statements. Assumption 1 has been completed as an example.
Income Balance
Statement Sheet Line
Line Item(s) Item (s)
directly directly
Assumption impacted. impacted.
IS
3 Assume inflation of 4% on expenses, not including depreciation and taxes. This is in addition to the 2,3.4,5,6,7,11 None
This is in addition to the new initiative's costs..
4 Assume the following regarding variables versus fixed-nature-of-income-statement operating
expenses for the existing business:
a. 80% of wage benefits is variable and 20% is fixed. 0.5
b. 100% of fuel expenses, purchased transportation, and operating supplies is variable. 0.5
c. 100% of operating taxes is fixed. 0.5
d. 20% of insurance and claims is fixed; the balance is variable. 0.5
e. Assume depreciation, even with new expenditures, is fixed as the retirement of written-off 0.5
assets, equaling new equipment.
5 There will be new spending areas reflected on future budgets to reflect added satellite warehouse
costs and space rental and costs of running the locations.
a. In the first year, add $10 million of inflation, space rental, and operating costs at 25% of 0.5
revenues from the new initiative.
b. In the second year, add $10 million space rental, with inflation at the same variable percentage 0.5
of sales.
c. In the third year, add $7.5 million of the variable percentage of sales. 0.5
6 In marketing, budget accounts have been added for new incurred costs. We will continue our 0.5
present promotion and launch a new program, with the assistance of our marketing partner, the ABC
Marketing Agency. They will advise us on the type, frequency, and content of new messages.
Assume 100% of the existing budget is fixed with respect to volume along with new expenses. We
expect incremental expenses, with $5 million of inflation in the first three years.
7 Our existing sales force, comprised of four national account managers, will call on clients such as 0.5
Wal-Mart®, Sears®, and Best Buy®. Existing expenses are assumed to be 100% fixed in relation to
revenue. To tap into specialized markets, our strategy is aimed at adding four industry-specific
managers, each with a salary base of $50,000 and 2% commission of generated revenues.
8 The human resources budget will not change substantially aside from added hiring, recruiting, 0.5
training, and drug testing fees. Assume 10% of expenses is fixed; the balance is variable with
volume.
9 Assume current assets and liabilities are variable. Expect an addition of $10 million to operating 0.5
property, spent in the first year. Our payment to vendors, suppliers, and taxes will be in thirty-day
terms. We expect all payments to be in sixty-day terms.
10 Assume revenue growth from our existing business will grow at 8% versus 10% in past years. Our 0.5
new strategy, however, adds incremental consulting revenues of $3.5, $4.5, and $6.5 million in the
first, second, and third years. New warehousing will add revenue of $10, $30, and $40 million in the
first, second, and third years. All new revenue will be subject to commissions for industry-specific
managers.
11 Using 2006 data, calculate the current ratio. 0.5
12 Using 2006 data, calculate the profit percentage 0.5
13 Using 2006 data, calculate the debt to asset ratio 0.5
14 Explain how EFN can be calculated using the income statement and balance sheet. 0.5
15 Complete the 2007 pro forma statements (income statement and balance sheet) using the following guidelines: 6
Sales increase 10% from 2006.
Use line items 4 and 9 to determine which expenses are variable (change with sales) and which are fixed.
16 Does Huffman need to borrow money? That would be your EFN calculation 2.5
TOTAL POINTS FOR ASSIGNMENT 20 0
Huffman Trucking Historical Financial Statements
(Unaudited)
(In Thousands)
Income Statement Historical Data
Line Item 2006 % of 2005 % of
Reference 2007 Estimate 2006 Sales 2005 Sales 2004 2003 2002
Revenue IS 1 $879,944 $807,288 100.00% $685,432 $603,852 $555,778
Operating Expenses
Salaries, Wages & Benefits IS 2 $353,739 $330,597 40.95% $293,212 $266,556 $251,468
Fuel Expense IS 3 $217,363 $192,357 23.83% $139,389 $111,067 $104,780
Operating Supplies and Expenses IS 4 $152,318 $136,319 16.89% $121,442 $107,471 $95,956
Purchased Transportation IS 5 $89,957 $82,529 10.22% $75,026 $64,400 $54,392
Operating Taxes & Licenses IS 6 $18,613 $17,989 2.23% $16,170 $14,700 $14,272
Insurance & Claims IS 7 $13,526 $13,006 1.61% $11,587 $10,534 $9,405
Provision for Depreciation IS 8 $2,726 $2,738 0.34% $2,663 $2,590 $2,598
Total Operating Expenses IS 9 $848,242 $775,535 96.07% $659,489 $577,318 $532,871
Operating Income from Continuing Operations IS 10 $31,702 $31,753 3.93% $25,943 $26,534 $22,907
Interest Expense IS 11 $790 $901 0.11% $1,036 $1,147 $1,111
Tax Expense IS 12 $11,701 $12,050 1.49% $10,917 $10,879 $9,163
Net Income IS 13 $19,211 $18,802 2.33% $13,990 $14,508 $12,633
Balance Sheet Historical Data
Line Item 2006 % of 2005 % of
Reference 2006 Sales 2005 Sales 2004 2003 2002
Current Assets
Cash & Cash Equivalents BS 1 $51,993 $38,893 4.82% $33,610 $30,071 $22,086
Accounts Receivable BS 2 $56,292 $57,441 7.12% $53,935 $46,043 $48,492
Prepaid Expenses & Supplies BS 3 $3,443 $3,343 0.41% $3,269 $3,174 $2,760
Total Current Assets BS 4 $111,728 $99,677 12.35% $90,814 $79,288 $73,338
Carrier Operating Property (at cost) BS 5 $73,024 $70,957 8.79% $69,009 $67,103 $65,166
Less: Allowance for Depreciation BS 6 ($57,536) ($55,477) -6.87% ($53,473) ($51,424) ($49,356)
Net Carrier Operating Property BS 7 $15,488 $15,480 1.92% $15,536 $15,679 $15,810
Assets of Discontinued Operations BS 8 $16,192 $18,891 2.34% $21,590 $24,288 $26,987
Goodwill (net) BS 9 $57,767 $53,977 6.69% $55,646 $56,782 $51,380
Other Assets BS 10 $26,613 $24,194 3.00% $23,263 $25,564 $25,822
Total Assets BS 11 $227,788 $212,219 26.29% $206,849 $201,601 $193,337
Current Liabilities
Accounts Payable BS 12 $47,124 $39,936 4.95% $42,038 $30,462 $31,404
Salaries & Wages BS 13 $29,753 $27,048 3.35% $24,313 $21,904 $20,664
Current Portion of Long-Term Debt BS 14 $2,204 $2,514 0.31% $2,890 $3,200 $3,544
Freight & Casualty Claims Payable BS 15 $9,746 $8,941 1.11% $8,356 $7,737 $7,369
Total Current Liabilities BS 16 $88,827 $78,439 9.72% $77,597 $63,303 $62,981
Long-Term Liabilities
Accrued Pension & Post Retirement Health Care BS 17 $58,362 $52,721 6.53% $47,390 $42,694 $38,813
Long-Term Debt BS 18 $13,431 $15,318 1.90% $17,607 $20,497 $22,697
Total Long Term Liabilities BS 19 $71,793 $68,039 8.43% $64,997 $63,191 $61,510
Shareholders' Equity
Common Stock
($1 par value
Authorized: 20,000,000 shares) BS 20 $3.882 $3.882 0.00% $3.882 $3.882 $3.882
Treasury Shares BS 21 ($1.952) ($1.952) 0.00% ($1.952) ($1.952) ($1.952)
Retained Earnings BS 22 $67,166 $65,739 8.14% $64,253 $75,105 $68,844
Total Shareholders' Equity BS 23 $67,168 $65,741 8.14% $64,255 $75,107 $68,846
Total Liabilities and Shareholders' Equity BS 24 $227,788 $212,219 26.29% $206,849 $201,601 $193,337
The only assumption you need to use for the pro forma is a 10% increase in sales. The other assumptions
he other assumptions are from the strategic direction memo
