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C a s e 1 . J a n e M c D o n a l d , a f i n a n c i a l a n a l y s t f o r C a r r o l l C o m p a n y , h a s p r e p a r e d t h e f o l l o w i n g s a l e s a n d c a s h d i s b u r s e m e n t e s t i m a t e s f o r t h e p e r i o d F e b r u a r y t o J u n e o f t h e c u r r e n t y e a r .
M o n t h S a l e s C a s h d i s b u r s e m e n t
F e b . $ 5 0 0 $ 4 0 0
M a r c h 6 0 0 3 0 0
A p r i l 4 0 0 6 0 0
M a y 2 0 0 5 0 0
J u n e 2 0 0 2 0 0
M c D o n a l d n o t e s t h a t h i s t o r i c a l l y , 3 0 % o f s a l e s h a v e b e e n f o r c a s h . O f c r e d i t s a l e s , 7 0% a r e c o l l e c t e d 1 m o n t h a f t e r t h e s a l e , a n d t h e r e m a i n i n g 3 0 % a r e c o l l e c t e d 2 m o n t h s a f t e r t h e s a l e . T h e f i r m w is h e s t o m a i n t a i n a m i n i m u m e n d i n g b a l a n c e i n i t s c a s h a c c o u n t o f $ 2 5 . B a l a n c e s a b o v e t h i s a m o u n t w o u l d b e i n v e s t e d i n s h o r t - t e r m g o v e r n m e n t s e c u r i t i e s ( m a r k e t ab l e s e c u r i t i e s ) , w h e r e as a n y d e f i c i t s w o u l d b e f i n a n c e d t h r o u g h s h o r t - t e r m b a n k b o r r o w i n g (n o t e s p a y a b l e) . T h e b e g i n n i n g c a s h b a l a n c e a t A p r i l 1 i s $ 1 1 5 .
Q u e s t i o n :
1 . A p r o f o r m a b a l a n c e s h e e t d a t e d a t t h e e n d o f J u n e i s t o b e p r e p a r e d f r o m t h e i n f o r m a t i o n p r e s e n t e d . G i v e t h e s i z e o f e a c h o f t h e f o l l o w i n g : c a s h , n o t e s p a y a b l e , m a r k e t a b l e s e c u r i t i e s , a n d a c c o u n t s r e c e i v a b l e .
C a s e 2 . H u m b l e M a n u f a c t u r i n g i s i n t e r e s t e d i n m e a s u r i n g i t s o v e r a l l c o s t o f c a p i t a l . T h e f i r m i s i n t h e 4 0 % t a x b r a c k e t . Cu r r e n t i n v e s t i g a t i o n h a s g a t h e r e d t h e f o l l o w i n g d a t a :
D e b t . T h e f i r m c a n r a i s e d e b t b y s e l l i n g $ 1 , 0 0 0 - p a r - v a l u e , 1 0 % c o u p o n i n t e r e s t r a t e , 1 0 - y e a r b o n d s o n w h i c h a n n u a l i n t e r e s t p a y m e n t s w i l l b e m a d e . T o s e l l t h e i s s u e , a n a v e r a g e d i s c o u n t o f $ 3 0 p e r b o n d m u s t b e g i v e n . T h e f i r m m u s t a l s o p a y f l o t a t i o n c o s t s o f $ 2 0 p e r b o n d .
P r e f e r r e d s t o c k . T h e f i r m c a n s e l l 1 1 % ( a n n u a l d i v i d e n d ) p r e f er r e d s t o c k a t i t s $ 1 0 0 - p e r - s h a r e p a r v a l u e . T h e c o s t o f i s s u i n g a n d s e l l i n g t h e p r e f e r r e d s t o c k i s e x p e c t e d t o b e $ 4 p e r s h a r e .
C o m m o n s t o c k . T h e f i r m ’ s c o m m o n s t o c k i s c u r r e n t l y s e l l i n g f o r $ 8 0 p e r s h a r e . T h e f i r m e x p e c t s t o p a y c a s h d i v i d e n d s o f $ 6 p e r s h a r e n e x t y e a r . T h e f i r m ’ s d i v i d e n d s h a v e b e e n g r o w i n g a t a n a n n u a l r a t e o f 6 % , a n d t h i s r a t e i s e x p e c t e d t o c o n t i n u e i n t h e f u t u r e . T h e s t o c k w i l l h a v e to b e u n d e r p r i c e d b y $ 4 p e r s h a r e , a n d f l o t a t i o n c o s t s a r e e x p e c t e d t o a m o u n t t o $ 4 p e r s h a r e .
R e t a i n e d e a r n i n g s . T h e f i r m e x p e c t s t o h a v e $ 2 2 5 , 0 0 0 o f r e t a i ne d e a r n i n g s a v a i l a b l e i n t h e c o m i n g y e a r . O n c e t h e s e r e t a i n e d e a r n i n g s a r e e x h a u s t e d , t h e f i r m w i l l u s e n e w c o m m o n s t o ck a s t h e f o r m o f c o m m o n s t oc k e q u i t y f i n a n c in g .
Q u e s t i o n
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