P4â5 Classifying inflows and outflows of cash Classify each of the following items as aninflow (I) or an outflow (O) of cash, or as neither (N).LG 2LG 2Item Change ($) Item Change ($)Cash +100 Accounts receivable ?700Accounts payable ?1,000 Net profits +600Notes payable +500 Depreciation +100Long-term debt ?2,000 Repurchase of stock +600Inventory +200 Cash dividends +800Fixed assets +400 Sale of stock +1,000P4â6 Finding operating and free cash flows Consider the following balance sheets andselected data from the income statement of Keith Corporation.December 31Assets 2015 2014Cash $ 1,500 $ 1,000Marketable securities 1,800 1,200Accounts receivable 2,000 1,800Inventories 2,900 2,800Total current assets $ 8,200 $ 6,800Gross fixed assets $29,500 $28,100Less: Accumulated depreciation 14,700 13,100Net fixed assets $14,800 $15,000Total assets $23,000 $21,800Liabilities and stockholdersâ equityAccounts payable $ 1,600 $ 1,500Notes payable 2,800 2,200Accruals 200 300Total current liabilities $ 4,600 $ 4,000Long-term debt 5,000 5,000Total liabilities $ 9,600 $ 9,000Common stock $10,000 $10,000Retained earnings 3,400 2,800Total stockholdersâ equity $13,400 $12,800Total liabilities and stockholdersâ equity $23,000 $21,800Keith Corporation Balance SheetsISBN 1Depreciation expense $1,600Earnings before interest and taxes (EBIT) 2,700Interest expense 367Net profits after taxes 1,400Tax rate 40%a. Calculate the firmâs net operating profit after taxes (NOPAT) for the year endedDecember 31, 2015, using Equation 4.1.b. Calculate the firmâs operating cash flow (OCF) for the year ended December 31,2015, using Equation 4.3.c. Calculate the firmâs free cash flow (FCF) for the year ended December 31, 2015,using Equation 4.4.d. Interpret, compare, and contrast your cash flow estimates in parts b and c.P4â9 Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and$60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and$100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishesto maintain a minimum cash balance of $5,000. Given the following data, prepareand interpret a cash budget for the months of May, June, and July.(1) The firm makes 20% of sales for cash, 60% are collected in the next month,and the remaining 20% are collected in the second month following sale.LG 4LG 4Depreciation expense $1,600Earnings before interest and taxes (EBIT) 2,700Interest expense 367Net profits after taxes 1,400Tax rate 40%Keith Corporation Income Statement Data (2015)LG 4ISBN 1-269-86847-0Principles of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright Â© 2015 by Pearson Education, Inc.152 PART 2 Financial Tools(2) The firm receives other income of $2,000 per month.(3) The firmâs actual or expected purchases, all made for cash, are $50,000,$70,000, and $80,000 for the months of May through July, respectively.(4) Rent is $3,000 per month.(5) Wages and salaries are 10% of the previous monthâs sales.(6) Cash dividends of $3,000 will be paid in June.(7) Payment of principal and interest of $4,000 is due in June.(8) A cash purchase of equipment costing $6,000 is scheduled in July.(9) Taxes of $6,000 are due in June.P4â15 Pro forma income statement The marketing department of Metroline Manufacturingestimates that its sales in 2016 will be $1.5 million. Interest expense is expectedto remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividendsduring 2016. Metroline Manufacturingâs income statement for the year endedDecember 31, 2015, and a breakdown of the firmâs cost of goods sold and operatingexpenses into their fixed and variable components are given below.a. Use the percent-of-sales method to prepare a pro forma income statement for theyear ended December 31, 2016.b. Use fixed and variable cost data to develop a pro forma income statement for theyear ended December 31, 2016.c. Compare and contrast the statements developed in parts a and b. Which statementprobably provides the better estimate of 2016 income? Explain why.ISBN 1-269-86847-0Principles of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright Â© 2015 by Pearson Education, Inc.P4â18 Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. Itwishes to analyze expected performance and financing needs for 2017, which is2 years ahead. Given the following information, respond to parts a and b.(1) The percents of sales for items that vary directly with sales are as follows:Accounts receivable, 12%Inventory, 18%Accounts payable, 14%Net profit margin, 3%(2) Marketable securities and other current liabilities are expected to remainunchanged.(3) A minimum cash balance of $480,000 is desired.(4) A new machine costing $650,000 will be acquired in 2016, and equipmentcosting $850,000 will be purchased in 2017. Total depreciation in 2016 isforecast as $290,000, and in 2017 $390,000 of depreciation will be taken.(5) Accruals are expected to rise to $500,000 by the end of 2017.(6) No sale or retirement of long-term debt is expected.(7) No sale or repurchase of common stock is expected.(8) The dividend payout of 50% of net profits is expected to continue.(9) Sales are expected to be $11 million in 2016 and $12 million in 2017.(10) The December 31, 2015, balance sheet follows.Assets Liabilities and stockholdersâ equityCash $ 400 Accounts payable $1,400Marketable securities 200 Accruals 400Accounts receivable 1,200 Other current liabilities 80Inventories 1,800 Total current liabilities $1,880Total current assets $3,600 Long-term debt 2,000Net fixed assets 4,000 Total liabilities 3,880Total assets $7,600 Common equity 3,720Total liabilities andstockholdersâ equity $7,600Peabody & Peabody Balance Sheet December 31, 2015 ($000)a. Prepare a pro forma balance sheet dated December 31, 2017.b. Discuss the financing changes suggested by the statement prepared in part a.P5â2 Future value calculation Without referring to the preprogrammed function on yourfinancial calculator, use the basic formula for future value along with the given interestrate, r, and the number of periods, n, to calculate the future value of $1 ineach of the cases shown in the following table.Case Interest rate, r Number of periods, nA 12% 2B 6 3C 9 2D 3 4P5â6 Time value As part of your financial planning, you wish to purchase a new car exactly5 years from today. The car you wish to purchase costs $14,000 today, andyour research indicates that its price will increase by 2% to 4% per year over thenext 5 years.a. Estimate the price of the car at the end of 5 years if inflation is (1) 2% per yearand (2) 4% per year.b. How much more expensive will the car be if the rate of inflation is 4% ratherthan 2%?c. Estimate the price of the car if inflation is 2% for the next 2 years and 4% for3 years after that.P5â14 Time value An Iowa state savings bond can be converted to $100 at maturity6 years from purchase. If the state bonds are to be competitive with U.S. savingsbonds, which pay 8% annual interest (compounded annually), at what pricemust the state sell its bonds? Assume no cash payments on savings bonds priorto redemption.P5â22 Retirement planning Hal Thomas, a 25-year-old college graduate, wishes to retire atage 65. To supplement other sources of retirement income, he can deposit $2,000each year into a tax-deferred individual retirement arrangement (IRA). The IRA willearn a 10% return over the next 40 years.a. If Hal makes annual end-of-year $2,000 deposits into the IRA, how much will hehave accumulated by the end of his sixty-fifth year?b. If Hal decides to wait until age 35 to begin making annual end-of-year $2,000deposits into the IRA, how much will he have accumulated by the end of hissixty-fifth year?c. Using your findings in parts a and b, discuss the impact of delaying making depositsinto the IRA for 10 years (age 25 to age 35) on the amount accumulatedby the end of Halâs sixty-fifth year.d. Rework parts a,

b, and c, assuming that Hal makes all deposits at the beginning,rather than the end, of each year. Discuss the effect of beginning-of-year depositson the future value accumulated by the end of Halâs sixty-fifth year.P5-29 Value of a single amount versus a mixed stream Gina Vitale has just contractedto sell a small parcel of land that she inherited a few years ago. The buyer is willing topay $24,000 at the closing of the transaction or will pay the amounts shown in thefollowing table at the beginning of each of the next 5 years. Because Gina doesnâtreally need the money today, she plans to let it accumulate in an account that earns7% annual interest. Given her desire to buy a house at the end of 5 years after closingon the sale of the lot, she decides to choose the payment alternativeâ$24,000 singleamount or the mixed stream of payments in the following tableâthat provides thehigher future value at the end of 5 years. Which alternative will she choose?Mixed streamBeginning of year Cash flow1 $ 2,0002 4,0003 6,0004 8,0005 10,000P5â39 Compounding frequency and time value You plan to invest $2,000 in an individualretirement arrangement (IRA) today at a nominal annual rate of 8%, which is expectedto apply to all future years.LG 5LG 5LG 5LG 5Principles of Managerial Finance, Fourteenth Edition, by Lawrence J. Gitman and Chad J. Zutter. Published by Prentice Hall. Copyright Â© 2015 by Pearson Education, Inc.214 PART 2 Financial Toolsa. How much will you have in the account at the end of 10 years if interest is compounded(1) annually, (2) semiannually, (3) daily (assume a 365-day year), and(4) continuously?b. What is the effective annual rate (EAR) for each compounding period in part a?c. How much greater will your IRA balance be at the end of 10 years if interest iscompounded continuously rather than annually?d. How does the compounding frequency affect the future value and effective annualrate for a given deposit? Explain in terms of your findings in parts a through c.

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