The management of Idaho Produce is considering an increase in its use of financial leverage

16-10A. (Analysis of recessionary cash flows) The management of Idaho Produce is considering an increase in its use of financial leverage. The proposal on the table is to sell $10 million of bonds that would mature in 20 years. The interest rate on these bonds would be 15 percent. The bond issue would have a sinking fund attached to it requiring that one-twentieth of the principal be retired each year. Most business economists are forecasting a recession that will affect the entire economy in the coming year. Idaho’s management has been saying, “If we can make it through this, we can make it through anything.” The firm prefers to carry an operating cash balance of $1 million. Cash collections from sales next year will total $4 million. Miscellaneous cash receipts will be $300,000. Raw material payments will be $800,000. Wage and salary costs will total $1.4 million on a cash basis. On top of this, Idaho will experience nondiscretionary cash outflows of $1.2 million including all tax payments. The firm faces a 50 percent tax rate.

a. At present, Idaho is unlevered. What will be the total fixed financial charges the firm must pay next year?

b. If the bonds are issued, what is your forecast for the firm’s expected cash balance at the end of the recessionary year (next year)?

c. As Idaho’s financial consultant, do you recommend that it issue the bonds?

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Direct Marketing Inc. (DMI) offers database marketing strategies to help companies increase their sales

P 6. Direct Marketing Inc. (DMI) offers database marketing strategies to help companies increase their sales. DMI’s basic package of services includes the design of a mailing piece (either a Direct Mailer or a Store Mailer), creation and maintenance of marketing databases containing information about the client’s target group, and a production process that prints a promotional piece and prepares it for mailing. In its marketing strategies, DMI targets working women ages 25 to 54 who are married with children and who have an annual household income in excess of $50,000. DMI has adopted activity-based management, and its controller is in the process of developing an ABC system. The controller has identified the following primary activities of the
company:

Use database of customers Accounting
Service sales Mailer assembly
Deliver mailers to post office Process orders
Supplies storage Purchase supplies
Client follow-up Design mailer
Database research trends Building maintenance
Schedule order processing Processing cleanup
Personnel Mailer rework

Required
1. Identify the activities that do not add value to DMI’s services.
2. Assist the controller’s analysis by grouping the value-adding activities into the activity areas of the value chain shown in Figure 22-1.
3. State whether each non-value-adding activity is necessary or unnecessary. Suggest how each unnecessary activity could be reduced or eliminated.


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Carter Corporation's sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent

AFN equation - Carter Corporation's sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent. Its assets totaled $3 million at the end of 2005. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2005, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 5 percent, and the forecasted retention ratio is 30 percent. Use the AFN equation to forecast Carter's additional funds needed for the coming year.


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The Management of Russel Inc. is trying to decide whether it can increase its dividend

BE13-11 The Management of Russel Inc. is trying to decide whether it can increase its dividend. During the current year, it reported net income of $875,000. It had cash provided by operating activities of $643,000, paid cash dividends of $80,000, and had capital expenditures of $280,000.

Compute the company’s free cash flow, and discuss whether an increase in the dividend appears warranted. What other factors should be considered?

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During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000

During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000. It also experienced an increase in current assets of $150,000 and an increase in accounts payable and accruals of $75,000. If operating cash flow (OCF) for the year was $700,000, calculate the firm’s free cash flow (FCF) for the year.

Click here for the solution: During the year, Xero, Inc., experienced an increase in net fixed assets of $300,000 and had depreciation of $200,000

In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase

In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase. The price of the stock increased from $12 a share at the time of purchase to a current level of $45. Notwithstanding the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be over-priced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing and continuing to hold the shares. You reflect on these choices as well as other actions that could be taken. Describe the various actions that you might take and their implications.

Click here for the solution: In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase