Quiz 2 Name Work Sheet 1ba

Sheet1ba 316 Quiz 2name Work Is

Calculate your answers using excel or a financial calculator. Print the result and bring to class Monday, July 20, 2015. Be sure to show your work either by showing the keystrokes on the calculator or the formula in excel.

1. Compute the additional financing needed by Mahony Services Inc. (MSI) if sales are expected to increase from a current level of $22 million to a new level of $26 million over the coming year. MSI expects earnings after taxes to equal $1 million over the next year (2014). MSI intends to pay a $400,000 dividend next year. The current year balance sheet for MSI is as follows: Mahony Services, Inc. Balance Sheet as of December 31, 2013:

  • Cash: $1,500,000
  • Accounts Receivable: $1,800,000
  • Inventories: $6,300,000
  • Net Fixed Assets: $3,000,000
  • Accounts Payable: $4,000,000
  • Notes Payable: $3,000,000
  • Long-term Debt: $2,100,000
  • Stockholder's Equity: $3,500,000
  • Total Assets: $12,600,000
  • Total liabilities and equity: $12,600,000

2. Mahony Machinery is attempting to develop and market a new quilting machine. Fixed costs to develop and produce the new quilting machine are estimated to be $8 million per year. The variable cost to make each machine has been estimated at $1,000. The marketing research department has recommended a price of $3,000 per machine.

A) What is the breakeven level of output for the new quilting machine?

B) If management expects to generate a target profit of $1.5 million from the machine each year, how many machines must be sold?

3. Mahony Company sells on terms of "net 30." Annual credit sales are $60 million, and its accounts receivable average 10 days overdue.

A) Determine Mahony Company's investment in receivables.

B) Suppose that annual credit sales decline by 10% and customers delay their payments to an average of 20 days past due. Determine the company's new level of receivables investment.

Paper For Above instruction

The assignment involves calculating financial metrics for Mahony Services Inc. (MSI) and Mahony Machinery, as well as analyzing accounts receivable investments for Mahony Company. The tasks require a sound understanding of financial statements, break-even analysis, and receivables management, conducted through the use of Excel or a financial calculator.

Introduction

Financial analysis is an essential skill in corporate finance, aiding managers in making informed decisions about financing needs, production levels, and credit policies. This paper addresses three key questions involving incremental financing, capacity planning for new products, and receivable management, utilizing relevant financial principles and formulas.

Part 1: Additional Financing Needed for MSI

The first task is to determine the additional financing required by MSI, assuming sales increase from $22 million to $26 million. Key related concepts include the percentage of spontaneous liabilities, retained earnings, and the increase in assets needed to support higher sales.

Using the pro forma balance sheet, we analyze the increase in assets necessary to support the higher sales level. The working capital components – such as accounts receivable and inventories – tend to increase proportionally with sales. Based on the current asset-to-sales ratio, we project the increase in assets. The change in spontaneous liabilities, primarily accounts payable, is also considered. The net increase in assets minus spontaneous liabilities represents the additional financing required.

Part 2: Breakeven and Target Profit for the New Quilting Machine

The breakeven point (BEP) is calculated where total revenues equal total costs. The fixed costs of $8 million and variable costs of $1,000 per machine are used, along with the selling price of $3,000, to compute the BEP through the formula:

BEP (units) = Fixed Costs / (Price per unit - Variable cost per unit)

To attain a target profit of $1.5 million, the required sales volume considers both fixed costs and desired profit:

Required units = (Fixed Costs + Target Profit) / (Price per unit - Variable cost per unit)

Part 3: Accounts Receivable Analysis for Mahony Company

The accounts receivable investment is determined based on credit sales, days sales outstanding, and average collection period. Assuming sales are on credit terms of net 30, the receivable balance is calculated by:

Receivables = (Daily Credit Sales) x (Average Collection Days)

The decline in sales by 10% and an extension of the collection period to 20 days require recalculating the average receivables accordingly.

Discussion

The analysis highlights the importance of working capital management, capacity planning, and financial forecasting. Efficient management of receivables ensures sufficient liquidity, while understanding the impact of sales and costs on financing needs aids in strategic decision-making. Similarly, break-even and target profit analyses guide production and marketing strategies for new products.

Conclusion

In conclusion, accurate financial calculations are vital for operational and strategic planning. Utilizing spreadsheet tools and financial calculators enhances precision, allowing managers to optimize resources and improve financial health. The insights from this analysis facilitate better decision-making in capital investment, product development, and credit management.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Ross, S. A., Westerfield, R., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
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  • Gordon, L. A., & Natarajan, H. (2017). Strategic Management and Business Policy. Pearson.
  • Gitman, L. J., & Zutter, C. J. (2018). Principles of Managerial Finance. Pearson.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
  • Ross, S. A., & Westerfield, R. W. (2018). Essentials of Corporate Finance. McGraw-Hill Education.
  • Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2011). Corporate Financial Management. Pearson.
  • Reilly, F. K., & Brown, K. C. (2011). Investment Analysis and Portfolio Management. Cengage Learning.
  • Palepu, K., & Healy, P. (2013). Business Analysis and Valuation. Cengage Learning.

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