1) Sharpe Knife Company expects sales next year to be $1,740,000 if the economy
ID: 2649963 • Letter: 1
Question
1)
Sharpe Knife Company expects sales next year to be $1,740,000 if the economy is strong, $920,000 if the economy is steady, and $740,000 if the economy is weak. Mr. Sharpe believes there is a 20 percent probability the economy will be strong, a 55 percent probability of a steady economy, and a 25 percent probability of a weak economy.
What is the expected level of sales for the next year?
2)
Antivirus Inc. expects its sales next year to be $4,300,000. Inventory and accounts receivable will increase by $660,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout.
How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.
External funds needed
3)
Gary
How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.
Explanation / Answer
1) Expected level of sales = Sum of products of probability and sales of different possible economies
= (1740000 * 0.2) + (920000 * 0.55) + (740000 * 0.25)
= 1,039,000
2) Profit margin = 15 % so the Profit expected next year = 0.15 * 4,300,000 = 645,000
Retained earnings = b * Net Profilt
Here , b = Retention ratio = 1-0.35 = 0.65
Retained earnings = 0.65 * 645000 = 419,250
660,000 - 419,250 = 240,750 will be needed from external financing.
3)Expected level of sales = Sum of products of probability and sales of different possible economies
= (1,060,000 * 0.1) + (730,000 * 0.5) + (391,000 * 0.4)
= $ 627,400
4) Profit margin = 20 % , so the Profit expected next year = 0.2 * 490,000 = 98,000
Retained earnings = b * Net Profilt
Here , b = Retention ratio = 1-0.5 = 0.5
Retained earnings = 0.5 * 98000 = 49,000
75,000 - 49,000 = 26,000 will be needed from external financing.
5)
5-a) Ending Inventory = Initial Inventory - COGS
Ending Inventory March Month = 9,300 - 4200 = 5100
Ending Inventory April Month = 5100 + 9300 - 8200 = 6200
Ending Inventory May Month = 6200+ 9300 - 13400 = 2100
Ending Inventory June Month = 2100+ 9300 - 11400 = 0
5-b )
Financing cost March Month = ( 5100 * 20 ) * 0.005 = $ 510
Financing cost April Month = ( 6200 * 20 ) * 0.005 = $ 620
Financing cost May Month = ( 2100 * 20 ) * 0.005 = $ 210
Financing cost June Month = 0
Total Cost for all four month = $ 1340
6)
6-a) Ending Inventory = Initial Inventory - COGS
Ending Inventory Oct Month = 3,475 - 1650 = 1825
Ending Inventory Nov Month = 1825 + 3475 - 2650 = 2650
Ending Inventory Dec Month = 2650+ 3475 - 5300 = 825
Ending Inventory Jan Month = 825+ 3475 - 4300 = 0
6-b )
Financing cost Oct Month = ( 1825 * 8 ) * 0.001 = $ 14.6
Financing cost Nov Month = ( 2650 * 8 ) * 0.001 = $ 21.2
Financing cost Dec Month = ( 825 * 8 ) * 0.001 = $ 6.6
Financing cost Jan Month = 0
Total Cost for all four month = $ 42.4
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