Exam 9: Prospective Analysis

Sensitivity analysis is used to examine the assumptions used in the preparation of projected financial statements.

Ceteris paribus, the quicker a company the company collects money from its sales the greater its liquidity.

Below is selected data for Gertup Corporation as of 12/31/05: Total assets \ 5,500 Current assets 2,750 Long-term debt 450 Current ratio 2.5 Inventory 1,500 For year ended 12/31 105 Sales \ 18,500 Cost of goods sold 14,800 -Gertup has maintained the same inventory levels throughout 2005. If end of year inventory turnover was increased to 12 through more efficient relationships with suppliers how much cash would be freed up (pick closest number)?

The assumptions made about future changes in the company have a great effect on the quality of the projected financial statements.

Which of the following is the most useful in assessing short-term liquidity of a company?

Hiruit company's sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is: Collections Percentage of total receivables In month of sale 10\% In second month 70\% In third month 15\% Not collectible 5\% Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400. -What cash is paid for purchases in the month of March?

Which of the following statements is incorrect?

Once the projected financial statements are prepared there is no need for sensitivity analysis to examine the assumptions used in the preparation.

The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are: January February March Expected Sales \ 200 \ 220 \ 300 50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received. -Cash outflows in March for purchases will be:

What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)? I. Project future cash II. Project future accounts receivable III. Project future accounts payable IV. Project future property plant and equipment

Problem Seven: External Funding You are an analyst examining a Real Estate Investment Trust (REIT) stock. REITs acquire and manage income-producing properties, such as offices, malls, apartment blocks, etc. They are unique in that they do not have to pay corporate taxes. However, they must distribute 90% of their income as dividends. What is the effect of this distribution requirement going to mean to REITs in terms of their need for external funding, growth and leverage?

The major use of cash for rapidly growing companies is sale of investments.

The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are: January February March Expected Sales \ 200 \ 220 \ 300 50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received. -The cash inflows in March from sales will be:

The cash flow from operations and cash flow from investing are both positive. Which of the following best describes the situation of Georgey?

The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are: January February March Expected Sales \ 200 \ 220 \ 300 50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received. -Recorded bad debt expense for March should be:

You are the treasurer of Hodgkiss Suppliers Corporation (HSC), a sporting goods equipment distributor. You are trying to determine the cash flow needs for the company for the first three months of 2006. Actual Figures-2005 Estimated-2006 Oct Nov Dec Jan Feb Mar Sales 500 600 650 700 750 800 Purchases 520 580 580 620 630 660 S, G \&A 100 100 100 100 100 100 Cash balance 10 Other information: ● 50% of sales are on a cash basis, of the remaining 50% half is collected in the following month and the other half two months later ● All purchases are paid for in the following month ● Selling, General and Administrative costs are fixed, and are paid as incurred ● Dividends payable in February are $20 ● Interest payment is due in March of $50 ● Minimum cash balance required is $10 a. Estimate what if any, HSC requires in the way of additional external financing at the beginning of January to ensure they have enough cash to maintain a $10 cash balance through until the end of March. b. If additional external financing is not available name three approaches HSC might use in order to avoid the need for external financing.

ROE is defined as net income divided by total assets.

Common size analysis of the statement of cash flows is a useful tool in determining major sources and uses of cash.

The residual income model defines stock price as book value plus the present value of residual income. What is the effect on stock price in a given period if the firm's cost of capital is greater than its return on equity?

Prospective analysis can only be conducted after historical financial statements have been adjusted.