IUB BUS-F 300 - Exam 3 Study Guide (8 pages)

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Exam 3 Study Guide

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Exam 3 Study Guide


Study Guide
Indiana University, Bloomington
Bus-F 300 - Intro Financial Management
Intro Financial Management Documents
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BUS F 300 1st Edition Exam 3 Study Guide Ch 4 Financial Forecasting Most comprehensive means of financial forecasting is to develop a series of pro forma financial statements With these statements firm can estimate its future level of receivables inventory payables and other corporate accounts as well as its anticipated profits and borrowing requirements Use a six month time frame to facilitate analysis but could be extended to a year or longer Development of pro forma statements will provide projection of profit the firm anticipates making over a certain period of time 1 Establish sales projection 2 Determine a production schedule and the associated use of new material direct labor and overhead to arrive at gross profit projected quantity of unit sales Desired ending inventory Beginning inventory Production requirements Value of ending inventory Beginning inventory value total production costs Total inventory available for sales Cost of goods sold Ending inventory 3 Compute other expenses 4 Determine profit by completing the actual pro forma statement Cash Budget Translate the pro forma income statement into cash flows of smaller and more precise time frames to anticipate seasonal and monthly patterns of cash inflow and outflow because generation of sales and profits does not necessarily mean there will be adequate cash on hand Primary purpose is to allow firm to anticipate the need for outside funding at the end of each month Cash receipts monthly cash collections inflow Cash payments Monthly costs associated with inventory manufactured during the period material labor and overhead and disbursements for general and administrative expenses interest payments taxes and dividends and for any new plant and equipment Equal monthly costs bc assume we are employing level monthly production to ensure maximum efficiency even though sales volume varies month to month Net cash flow difference between monthly receipts and payments Pro forma balance sheet represents cumulative changes in the corp over time First examine prior periods balance sheet and translate those items to present time Example Percent of sales method An alternative to tracing cash and accounting flows to determine financial needs is to assume that accounts on the balance sheet will maintain a given percentage relationship to sales We then indicate a change in sales level and ascertain our related financing needs end product for both methods is the determination of the amount of new funds needed to finance the activities of the firm to sales method is easier but less meaningful bc do not get a month to month breakdown of data no percentages are computed for notes payable common stock and RE bc they are not assumed to maintain a direct relationship with sales volume Once we know how much money we need to finance growth then decide whether to finance sales growth with notes payable sale of common stock or use of long term debt If operating at full capacity need to buy new equipment to increase sales if operating at less than full capacity only need new current assets Required new funds RNF A S S L S S PS 1 D A S Relationship of variable assets to sales S Change in sales L S Relationship of variable liabilities to sales P profit margin S New sales level D Dividend payout ratio Ch 8 Sources of Short Term Financing Spontaneous source of funds an accounts payable growing as the business expands on a seasonal or long term basis and contracting in a like fashion when business declines Trade credit is usually extended for 30 60 days but can stretch payment period Major variable in determining payment period is possible existence of a cash discount Cash discount allows a reduction in price if payment is made within a specified time period 2 10 net 30 cash discount means you can discount 2 if repay within 10 days or pay in full within the 30 days Cost of failing to take a cash discount Discount percent 100 Discount percent X 360 Final due date Discount period Net trade credit relationship bt accounts receivable and accounts payable positive when accounts receivable are greater than accounts payable and vice versa Self liquidating loan the use of funds will ensure a built in or automatic repayment scheme typical banker prefers these 2 3 of bank loans are short term in nature Prime rate the rate a bank charges its most creditworthy customers and usually increases as a customer s credit risk gets higher average customer expects to pay 1 2 points above prime in tight money periods 5 or more is expected London Interbank Offered Rate LIBOR US prime rates compete with the LIBOR for those companies with an international presence or sophisticated enough to use the London Eurodollar market for loans Compensating balance A bank may require that business customers either pay a fee for the service or maintain a minimum average account balance or both lower the interest rate the higher the compensating balance When compensating balances are required to obtain a loan required amount is usually computed as a of customer loans outstanding or of bank commitments toward future loans to a given account usually 20 for outstanding 10 for future commitments Amount to be borrowed Amount needed 1 c c compensating balance as decimal If it were not for compensating balances quoted interest rates would be higher or gratuitous services now offered by banks would carry a price tag Term loan Credit is extended for 1 7 years usually repaid in monthly or quarterly installments over its life rather than in one single payment more use in last decade only superior credit applicants can qualify measured by working capital strength potential profitability competitive position Banker and business firm are climbing into bed together bc of length usually not fixed interest rate changes with market conditions can be tied to prime rate or LIBOR usually priced at a premium over one of the rate risk is with borrower Effective interest rate on loan is based on loan amount dollar interest paid length of loan and method of repayment Effective rate Interest Principal X Days in the year 360 Days loan is outstanding Time is extremely important so is the way interest is paid Discounted Loan Deducts the interest in advance increasing the effective rate of interest Effective rate on discounted loan Interest Principal Interest X Days in the year 360 Days loan is outstanding Effective rate with compensating balances Stated interest rate 1 c OR when stated rate is unknown Interest

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