Finance For Managers – GVP8

Remember to submit your work following the file naming convention FirstInitial.LastName_M01.docx. For example, J.Smith_M01.docx. Remember that it is not necessary to manually type in the file extension; it will automatically append. Start by reading and following these instructions: 1. Quickly skim the questions or assignment below and the assignment rubric to help you focus. 2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully. 3. Consider the discussion and the any insights you gained from it. 4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling. Assignment: Answer these essay questions: 1. PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT, PART 1 You have recently been hired by Piepkorn Manufacturing to work in its newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes. Gary Piepkorn, the owner of the company, works primarily in the sales and production areas. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and that’s what you’ve been brought in to do. The company currently has a cash balance of $154,000 and plans to purchase new box folding machinery in the fourth quarter at a cost of $325,000. The purchase of the machinery will be made with cash because of the discount offered. The company’s policy is to maintain a target cash balance of $100,000. All sales are in cash and all purchases are made on credit. Gary Piepkorn has projected the following gross sales for each of the next four quarters: Quarters 01 02 03 04 Gross Sales $863,500 $918,500 $996,000 $924,000 Gross sales for the first quarter of next year are projected at $908,000. Piepkorn typically orders 50 percent of next quarter’s projected gross sales in the current quarter, and suppliers are typically paid in 53 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of $115,000 on its long-term debt. The company uses a local bank for its short-term financial needs. It pays 1.5 percent per quarter on all short-term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term deposits. Gary has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs. QUESTIONS a. Use the numbers given to complete the cash budget and short-term financial plan. b. Rework the cash budget and short-term financial plan assuming Piepkorn changes to a target balance of $80,000. PIEPKORN MANUFACTURING Short-Term Financial Plan Q1 Q2 Q3 Q4 Beginning cash balance Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit) PIEPKORN MANUFACTURING Short-Term Financial Plan Q1 Q2 Q3 Q4 Target cash balance Net cash inflow New short-term investments Income from short-term investments Short-term investments sold New short-term borrowing Interest on short-term borrowing Short-term borrowing repaid Ending cash balance Minimum cash balance Cumulative surplus (deficit) Beginning short-term investments Ending short-term investments Beginning short-term debt Ending short-term debt 2. PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT, PART 2 After completing the short-term financial plan for next year (above part 1), Gary Piepkorn approaches you and asks about the company’s credit policy. In looking at the competition, most companies in the industry offer credit to customers, so Piepkorn Manufacturing appears to be one of the few companies that does not. Several customers have expressed the possibility of changing to a different supplier because of the lack of credit. Gary is interested in knowing how implementing a credit policy will affect the short-term financial plan for next year. Additionally, he would like you to inquire as to the possibility of getting improved credit terms for the company’s purchases. To analyze the possible switch to the new credit terms, Gary has asked you to investigate industry standard credit terms and rework the short-term financial plan assuming Piepkorn Manufacturing offers credit to its customers. He would also like to investigate how better credit terms from the company’s suppliers would affect the short-term financial plan. a. You have looked at the credit policy offered by your competitors and have determined that the industry standard credit policy is 1/10, net 45. The discount will begin to be offered on the first day of the year. You want to examine how this credit policy would affect the cash budget and short-term financial plan. If this credit policy is implemented, you believe that 60 percent of customers will take advantage of the credit offer and the accounts receivable period will be 24 days. Rework the cash budget and short-term financial plan under the new credit policy and a target cash balance of $80,000. What interest rate are you effectively offering customers? b. You have talked to the company’s suppliers about the credit terms Piepkorn receives. Currently, the company receives terms of net 45. Your suppliers have stated that they would offer new credit terms of 2/25, net 40. The discount would begin to be offered on the first day of the year. What interest rate are the suppliers offering the company? Rework your cash budget and short-term financial plan from the previous question assuming you take advantage of the discount offered. 3. Suppose the rate of inflation in Russia will run about 3% higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the ruble versus dollar exchange rate? What relationship are you relying on in answering? 4. This question has to do with the Cash Account. Indicate the impact of the following corporate actions on cash, using the terms Increase, Decrease, or no change. For each, explain your conclusion. – A dividend is paid with funds received from a sale of debt – Real estate is purchased and paid for with short-term debt – Inventory is bought on credit – A short-term bank loan is repaid – Next years’ taxes are prepaid.