Business Finance II

BCO222 Business Finance II Task brief & rubrics

Task: Final Assignment (60% of course grade)

You are asked to answer all the questions in the proposed four cases.

This task assesses the following learning outcomes:

· Demonstrate understanding of financial forecasting and planning.

· Critically analyze working capital management and managing firm liquidity.

· Analyze the sources of short-term credit and its estimated cost.

LAUNCH: WEEK 5 / DELIVERY: WEEK 8 Sunday July 19th, 2020, 23:59hrs ON MOODLE

Submission file format: Word document with all the answers, clearly identifying each case separately.

CASE 1 (35 points)

The most recent financial statements for Majestic Corporation follow. Sales for 2020 are projected to increase by 15 percent. Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant dividend pay-out ratio. The firm is operating at full capacity and no new debt or equity is issued.

2019 Income Statement		Balance Sheet as at 31 December 2019
Sales Costs Taxable income Taxes (25%) Net income Dividends	€7,900 5,500 €2,400 600 €1,800 €720		Current assets Fixed assets Total assets	€3,900 8,600 €12,500	Current liabilities Long-term debt Equity Total liabilities & equity	€2,100 3,700 6,700 €12,500

Instructions:

a) Prepare Proforma Income Statement for 2020. Calculate Dividends and Addition to retained earnings in 2020. (10 points)

b) Prepare Proforma Balance Sheet for 2020. (10 points)

c) Calculate the amount of external financing needed in 2020. What financing options are available for the company? (5 points)

d) Assuming that the company operated at 90% capacity in 2019, re-calculate Proforma Total Assets in 2020. (5 points)

e) Discuss the role of financial planning. (5 points)

CASE 2 (20 points)

Here are some important figures from the budget of Marvin Corporation for the first quarter of 2020:

	January	February	March
Credit sales	€380,000	€396,000	€438,000
Credit purchases	147,000	175,500	200,500
Cash disbursements:
Wages, taxes, and expenses	39,750	48,210	50,300
Interest	11,400	11,400	11,400
Equipment purchases	83,000	91,000	0

Additional information:

· The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sale, and the remaining 60 percent will be collected in the following month.

· Credit purchases will be paid in the month following the purchase.

· In December 2019, credit sales were €210,000 and credit purchases were €156,000.

· Cash balance at 1 January 2020 is €280,000.

Instructions:

a) Using the above information, complete the following cash budget. (15 points)

	January	February	March
Beginning cash balance
Cash receipts:
Cash collections from credit sales
Total cash available
Cash disbursements:
Purchases
Wages, taxes, and expenses
Interest
Equipment purchases
Total cash disbursements
Ending cash balance

b) Discuss the role of cash budget. (5 points)

CASE 3 (20 points)

Lake Corporation has €950,000 in current assets, out of which €425,000 are considered permanent current assets. In addition, the firm has €750,000 invested in fixed assets. The company has two financing plans under consideration:

Plan 1: Lake wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. The balance will be financed with short-term financing, which currently costs 6 percent. Lake’s earnings before interest and taxes are €350,000. The tax rate is 40 percent.

Plan 2: As an alternative, Lake might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. Earnings before interest and taxes will be €350,000. The same tax rate and interest rates apply as in Plan 1.

Instructions:

a) Determine Lake’s earnings after taxes under each financing plan. (10 points)

b) Which plan should Lake choose? Justify. (5 points)

c) What are some of the risks and cost considerations associated with each of these financing plans? (5 points)

CASE 4 (25 points)

Harper Corporation needs €750,000 to take a cash discount of 5/15, net 40. A banker will loan the money for 25 days at an interest cost of €19,100. Assume a 360-day year for your calculations.

Instructions:

a) What is the effective rate on the bank loan? (5 points)

b) How much would it cost (in percentage terms) if Harper did not take the cash discount, but paid the bill in 40 days instead of 15 days? (5 points)

c) Should Harper borrow the money to take the discount? Explain. (5 points)

d) If another banker requires a 20 percent compensating balance, how much must Harper borrow to end up with €750,000? (5 points)

e) What would be the effective interest rate in part d if the interest charge for 25 days were €13,300? Since there are no funds to count against the compensating balance requirement, should Harper borrow with the 20 percent compensating balance? (5 points)

Rubrics

	Descriptor
9-10	The student demonstrates an excellent understanding of the concepts.
8-8.9	The student demonstrates a good understanding of the concepts.
7-7.9	The student demonstrates a fair understanding of the concepts.
6-6.9	The student demonstrates some, but insufficient understanding of the concepts.
3-5.9	The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student.
1-2.9	The student demonstrates insufficient understanding of the concepts and does not mention any relevant ideas or concepts.
0	The student leaves the question blank or cheats.

Points are stated at the end of each question.