Robert C. Higgins Analysis for Financial Management by igr23038

VIEWS: 409 PAGES: 12

Robert C. Higgins Analysis for Financial Management document sample

• pg 1
```									                                                                                                    7/21/2011

ANALYSIS FOR FINANCIAL MANAGEMENT
8th Edition

Robert C. Higgins

Chapter 3

Calculations appear below on this worksheet and on following sheets.

1. a) Baltimore Beverages Company will need \$4.603 million in debt to finance its activities for
2002.
b) When the interdependency between long-term debt and interest expence is included,
interest expense increases to \$5.820 million from \$5.330 million and the need for new
financing rises from \$4.603 million to \$4.897 million (\$58.203 - \$53.306), or \$294,000.
(Note it is necessary to use “manual calculation” in this spreadsheet.
c) The increase in the loan need calculated in part (a) was \$4.603 million. The comparable
number in part (b) was \$4.897 million. They differ because the loan need in part (b)
includes the interdependence between the loan and interest expense. Note that although
interest expense rises \$490,000 in part (b), the tax-deductibility of interest results in an
increased loan need of only \$294,000.
d) Comparing Long-term debt in parts (b) and (d) below, the loan need rises \$2.732 million
(\$60.935 -\$58.203 million) as sales rise to 15%.
e) Under this scenario the loan need falls \$7.888 million from \$58.203 to \$50.315 million.
f) As shown on the following worksheet, cash and equivalents in 2006 equal \$6.016 mllion
and long-term debt equals \$55.166 million.
g) In this scenario, the indicated worksheet reveals that cash and equivalents will be \$5.489
million and long-term debt will be \$82.832 million, a substantial increase over the “base
case” debt observed in part (f).

2. See the worksheet entitled “Simulation Model” below. According to my numbers, the
treasurer will be 95% certain of raising sufficient money if he raises \$62.279 million. Your
numbers may answers to question 1 part a, b,d, and e.
Calculations fordiffer slightly.

Baltimore Beverages Company
Income Statement (in \$ millions)

1
7/21/2011

(a) Pro-Forma   (b) Pro-Forma
2002 ignoring   2002 including                 (e) Scenario
inter-          inter-    (d) Sensitivity   analysis
2001      Assumptions          dependencies    dependencies analysis 2002         2002

Sales                                     186.783         10%                  205.461         205.461         214.800       224.140
Cost of Goods Sold                         75.123         38%                   78.075          78.075          81.624        71.725

Gross Profit                              111.660                              127.386         127.386         133.176       152.415
Selling, General, & Administrative Exp.    93.653         50%                  102.731         102.731         107.400       112.070

Operating Income Before Deprec.            18.007                               24.655           24.655         25.776        40.345
Depreciation, Depletion, & Amortization     7.658         30%                    9.246            9.246          9.666        10.086

Operating Profit                           10.349                               15.410           15.410         16.110        30.259
Interest Expense                            5.330   initially constant           5.330            5.820          6.094         5.031

Pretax Income                               5.019                               10.080            9.589         10.017        25.227
Total Income Taxes                          2.008         40%                    4.032            3.836          4.007        10.091

Net income                                \$ 3.011                        \$       6.048   \$        5.754   \$      6.010   \$    15.136

2
7/21/2011

Balance Sheet (in \$ millions)
2001
ASSETS
Cash & Equivalents                       2.130            2%                     4.109         4.109       4.296       4.483
Account Receivable                      25.219           13%                    26.710        26.710      27.924      24.655
Inventories                             13.323            5%                    10.273        10.273      10.740      11.207
Prepaid Expenses                         2.925         no change                 2.925         2.925       2.925       2.925
Other Current Assets                     8.253            6%                    12.328        12.328      12.888      13.448
Total Current Assets        51.850                                  56.345        56.345      58.773      56.719

Net Plant, Property & Equipment          27.897          15%                    30.819         30.819     32.220      33.621
Intangibles                               3.377        no change                 3.377          3.377      3.377       3.377
Other Assets                              9.059           5%                    10.273         10.273     10.740      11.207
TOTAL ASSETS            \$ 92.183                                100.814   \$   100.814 \$   105.110   \$ 104.923

LIABILITIES
Accounts Payable                        12.201            6%                    12.328        12.328      12.888       13.448
Accrued Expenses                        10.664            5%                    10.273        10.273      10.740       11.207
Other Current Liabilities                1.253         no change                 1.253         1.253       1.253        1.253
Total Current Liabilities    24.118                                  23.854        23.854      24.881       25.908

Long Term Debt                          53.306      initially constant          53.306        58.203      60.935       50.314
Accrued wages                            7.919              3%                   6.164         6.164       6.444        6.724
Total Liabilities         85.343                                  83.324        88.221      92.260       82.947

EQUITY
Common Stock                             0.605           no change               0.605         0.605       0.605        0.605
Capital Surplus                         20.398           no change              20.398        20.398      20.398       20.398
no dividends paid so
Retained Earnings                       40.909    all income is retained        46.957        46.663      46.919       56.045
Less: Treasury Stock                    55.072           no change              55.072        55.072      55.072       55.072

TOTAL EQUITY               6.840                                  12.888        12.594      12.850       21.976

TOTAL LIABILITIES & EQUITY              92.183                                  96.211       100.814     105.110      104.923

Need for external financing                                                \$     4.603

3
Answer to Question 1 part f
BALTIMORE BEVERAGES COMPANY
Income Statement (in \$ millions)
Pro Forma Forecasts 2002 - 2006
2001       Assumptions                2002            2003        2004          2005            2006

Sales                                     186.783         10%                205.461        226.007        248.608       273.469       300.816
Cost of Goods Sold                         75.123         38%                 78.075         85.883         94.471       103.918       114.310

Gross Profit                              111.660                            127.386        140.125        154.137       169.551       186.506
Selling, General, & Administrative Exp.    93.653         50%                102.731        113.004        124.304       136.734       150.408

Operating Income Before Deprec.            18.007                             24.655         27.121         29.833        32.816        36.098
Depreciation, Depletion, & Amortization     7.658         30%                  9.246         10.170         11.187        12.306        13.537

Operating Profit                           10.349                             15.410         16.951         18.646        20.510        22.561
Interest Expense                            5.330   initially constant         5.820          5.809          5.759         5.664         5.517

Pretax Income                               5.019                              9.589         11.141         12.886        14.846        17.045
Total Income Taxes                          2.008         40%                  3.836          4.457          5.155         5.938         6.818

Net income                                  3.011                        \$     5.754   \$       6.685   \$     7.732   \$     8.908   \$    10.227
Balance Sheet (in \$ millions)
2001
ASSETS
Cash & Equivalents                   2.130          2%                  4.109         4.520         4.972         5.469       6.016
Account Receivable                  25.219         13%                 26.710        29.381        32.319        35.551      39.106
Inventories                         13.323          5%                 10.273        11.300        12.430        13.673      15.041
Prepaid Expenses                     2.925       no change              2.925         2.925         2.925         2.925       2.925
Other Current Assets                 8.253          6%                 12.328        13.560        14.916        16.408      18.049
Total Current Assets      51.850                             56.345        61.687        67.563        74.027      81.137

Net Plant, Property & Equipment     27.897         15%                 30.819        33.901        37.291        41.020      45.122
Intangibles                          3.377       no change              3.377         3.377         3.377         3.377       3.377
Other Assets                         9.059          5%                 10.273        11.300        12.430        13.673      15.041
TOTAL ASSETS            92.183                            100.814       110.265       120.662       132.098     144.677

LIABILITIES
Accounts Payable                    12.201          6%                 12.328        13.560        14.916        16.408      18.049
Accrued Expenses                    10.664          5%                 10.273        11.300        12.430        13.673      15.041
Other Current Liabilities            1.253       no change              1.253         1.253         1.253         1.253       1.253
Total Current Liabilities   24.118                             23.854        26.114        28.600        31.335      34.343

Long Term Debt                      53.306   initially constant        58.203        58.093        57.594        56.641      55.166
Accrued wages                        7.919           3%                 6.164         6.780         7.458         8.204       9.024
Total Liabilities        85.343                             88.221        90.987        93.652        96.180      98.533

EQUITY
Common Stock                         0.605       no change              0.605         0.605         0.605         0.605       0.605
Capital Surplus                     20.398       no change             20.398        20.398        20.398        20.398      20.398
no dividends paid
so all income is
Retained Earnings                   40.909        retained             46.663        53.347        61.079        69.987      80.213
Less: Treasury Stock                55.072       no change             55.072        55.072        55.072        55.072      55.072

TOTAL EQUITY              6.840                             12.594        19.278        27.010        35.918      46.144

TOTAL LIABILITIES & EQUITY          92.183                        \$   100.814   \$   110.265   \$   120.662   \$   132.098   \$ 144.677
Answer to Question 1 part g

BALTIMORE BEVERAGES COMPANY
Income Statement (in \$ millions)
Pro Forma Forecasts 2002 - 2006
2001      Assumptions            2002        2003     2004

Sales                                      ######          8%            201.726    217.864    235.293
Cost of Goods Sold                         75.123         40%             80.690     87.145     94.117

Gross Profit                               ######                        121.035    130.718    141.176
Selling, General, & Administrative Exp.    93.653         52%            104.897    113.289    122.352

Operating Income Before Deprec.            18.007                         16.138     17.429     18.823
Depreciation, Depletion, & Amortization     7.658         30%              9.078      9.804     10.588

Operating Profit                           10.349                          7.060       7.625     8.235
Interest Expense                            5.330   initially constant     6.226       6.686     7.181

Pretax Income                               5.019                          0.834       0.939     1.055
Total Income Taxes                          2.008         40%              0.334       0.376     0.422

Net income                                  3.011                        \$ 0.501    \$ 0.563    \$ 0.633

Balance Sheet (in \$ millions)
2001
ASSETS
Cash & Equivalents                          2.130         2%               4.035      4.357      4.706
Account Receivable                         25.219        13%              26.224     28.322     30.588
Inventories                                13.323         5%              10.086     10.893     11.765
Prepaid Expenses                            2.925      no change           2.925      2.925      2.925
Other Current Assets                        8.253         6%              12.104     13.072     14.118
Total Current Assets           51.850                         55.374     59.570     64.101

Net Plant, Property & Equipment            27.897        15%              30.259     32.680     35.294
Intangibles                                 3.377      no change           3.377      3.377      3.377
Other Assets                                9.059         5%              10.086     10.893     11.765
TOTAL ASSETS                 92.183                         99.096    106.519    114.537

LIABILITIES
Accounts Payable                           12.201         6%              12.104     13.072     14.118
Accrued Expenses                           10.664         5%              10.086     10.893     11.765
Other Current Liabilities                   1.253      no change           1.253      1.253      1.253
Total Current Liabilities        24.118                         23.443     25.218     27.135

Long Term Debt                             53.306   initially constant    62.261     66.861     71.806
Accrued wages                               7.919           3%             6.052      6.536      7.059
Total Liabilities            85.343                         91.755     98.615    106.000

EQUITY
Common Stock                                0.605      no change           0.605       0.605     0.605
Capital Surplus              20.398     no change         20.398     20.398    20.398

no dividends
paid so all
Retained Earnings            40.909 income is retained    41.410     41.973    42.606
Less: Treasury Stock         55.072     no change         55.072     55.072    55.072

TOTAL EQUITY     6.840                        7.341      7.904     8.537

TOTAL LIABILITIES & EQUITY   92.183                      \$ 99.096   #######   #######
ma Forecasts 2002 - 2006
2005       2006

254.116     274.446
101.646     109.778

152.470     164.667
132.140     142.712

20.329      21.956
11.435      12.350

8.894       9.606
7.712       8.283

1.182       1.322
0.473       0.529

\$ 0.709      \$ 0.793

5.082       5.489
33.035      35.678
12.706      13.722
2.925       2.925
15.247      16.467
68.995      74.281

38.117      41.167
3.377       3.377
12.706      13.722
123.195     132.547

15.247      16.467
12.706      13.722
1.253       1.253
29.206      31.442

77.120      82.832
7.623       8.233
113.949     122.507

0.605       0.605
20.398    20.398

43.315    44.109
55.072    55.072

9.246    10.040

#######   #######
Baltimore Beverages Co.
Income Statement (in \$ millions)

2001        Assumptions             2002

Sales                                     #######           12%                209.197
Cost of Goods Sold                         75.123           38%                 79.495   1,000 Trials
.030
Gross Profit                              111.660                              129.702
Selling, General, & Administrative Exp.    93.653           50%                104.598

.023
Operating Income Before Deprec.            18.007                               25.104
Depreciation, Depletion, & Amortization     7.658           30%                  9.414

Operating Profit                           10.349                               15.690        .015
Interest Expense                            5.330     initially constant         5.930

Pretax Income                               5.019                                9.760
Total Income Taxes                          2.008           40%                  3.904        .008

Net income                                \$ 3.011                          \$     5.856

.000
Balance Sheet (in \$ millions)
2001                                                      54.384   56.836
ASSETS                                                                                                                 C
Cash & Equivalents                        \$ 2.130           2%                   4.184
Account Receivable                         25.219          13%                  27.196
Inventories                                13.323           5%                  10.460
Prepaid Expenses                            2.925        no change               2.925
Other Current Assets                        8.253           6%                  12.552
Total Current Assets            51.850                               57.316

Net Plant, Property & Equipment             27.897         15%                 31.380
Intangibles                                  3.377       no change              3.377
Other Assets                                 9.059          5%                 10.460
TOTAL ASSETS                  \$ 92.183                         \$ 102.533

LIABILITIES
Accounts Payable                          \$ 12.201          6%                  12.552
Accrued Expenses                            10.664          5%                  10.460
Other Current Liabilities                    1.253       no change               1.253
Total Current Liabilities           24.118                              24.265

Long Term Debt                             53.306     initially constant        59.296
Accrued wages                               7.919             3%                 6.276
Total Liabilities               85.343                               89.836

EQUITY
Common Stock                                0.605        no change               0.605
Capital Surplus                            20.398        no change              20.398
no dividends
paid so all
Retained Earnings             40.909 income is retained      46.765
Less: Treasury Stock          55.072     no change           55.072

TOTAL EQUITY        6.840                         12.696

TOTAL LIABILITIES & EQUITY   \$ 92.183                     \$ 102.533
Forecast: Long-term Debt

Frequency Chart                                                 7 Outliers
30

22.5

15

7.5

Mean = 59.288
0

56.836                          59.288                              61.739   64.191
Certainty is 94.90% from -Infinity to 62.279 \$ M illions

```
To top