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1/ The alliance Corp expects to sell the following number of units of copper cables at the prices indicated under

three different scenarios in the economy. The probability of each


outcome is indicated. What is the expected value of the total sales projection?

Outcome Probability units Price
A 0.30 200 $15
B 0.50 320 30
C 0.20 410 40
Alliance Corporation
(1)
Outcome
(2)
Probability
(3)
Units
(4)
Price
(5)
Total value
(6)
Expected value (2x5)
A .30 200 $15 3,000 900
B .50 320 30 9,600 4,800
C .20 410 40 16,400 3,280
Total expected value $ 8,980

2/ Cyber Security Systems had sales of 3,000 units at $50 per unit last year. The marketing managers projects a 20 % increase in unit volume sales this yr. w/ a 10% price increase.
Returned merchandise will represent 6% of total sales. What is your net dollar sales projection for this yr.
Cyber Security Systems

Unit volume 3,000 x 1.20 ............................................................................................................................................................. 3,600

Price $50 x 1.10 ................................................................................................................................................................. x $55

Total Sales ...................................................................................................................................................................................... $198,000

Returns (6%) ................................................................................................................................................................................... 11,880

Net Sales......................................................................................................................................................................................... $186,120
3/ Sales expected to be 40,000 units for October. The company likes to maintain 15 percent of units sales for each month in ending
inventory (i.e. the end of October)). Beginning inventory for October is 8,500 units. How many units should Western Boot produce
for the coming months?
Solution:
Western Boot Stores
+ Projected sales ............................................................... 40,000 units
+ Desired ending inventory .............................................. 6,000 (15% x 40,000)
Beginning inventory ...................................................... 8,500
Units to be produced ..................................................... 37,500

4/Austin Electronics expects sales next year to be $900,000 if the economy is strong, $650,000 if the economy is steady, and $375,000 if the economy is weak. The
firm believes there is a 15 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 25 percent
probability of a weak economy. What is the expected level of sales for next year?

Solution: Austin Electronics
State of Economy
Sales

Probability
Expected Outcome
Strong $900,000 .15 $135,000
Steady 650,000 .60 390,000
Weak 375,000 .25 93,750
Expected level of sales = $618,750

5/Cobb Tie Shops, Inc., expects sales next year to be $300,000. Inventory and accounts receivable will increase by $60,000 to accommodate this sales level. The company has a
steady profit margin of 10 percent with a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is not increase in liabilities other than that
which will occur with the external financing.
Solution: Cobb Tie Shops, Inc.
$300,000 Sales
.10 Profit margin
30,000 Net income
9,000 Dividends (30%)
$ 21,000 Increase in retained earnings

$ 60,000 Increase in assets
21,000 Increase in retained earnings
$ 39,000 External funds needed

6/Antonio Banderos & Scarves sells headwear that is very popular in the fall-winter season. Units sold are anticipated as: October.... 1,000 November.... 2,000 December...4,000
January...3,000 If seasonal production is used, it's assumed that inventory will directly match sales for each month and there will be no inventory buildup. Antonio thinks the above
assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 10,000 items over four months at a level of 2,500 a month.
a)What is the ending inventory at the end of each month. Compare the unit sales to the units produced and keep a running total.
b)If the inventory costs $5 per unit and will be financed at the bank at a cost of 12%, what's the monthly financing cost and the total for the four months? I have the first part done but
just needed help on the financing cost.
Solution: Antonio Banderos and Scarfs
a. Units Sold Units Produced Change in inventory Ending Inventory
October 1,000 2,500 +1,500 1,500
November 2,000 2,500 + 500 2,000
December 4,000 2,500 1,500 500
January 3,000 2,500 500 0
b.
Ending Inventory

Cost per Unit ($5)
Inventory
Financing Cost at (1% per month)
October 1,500 7,500 75
November 2,000 10,000 1,00
December 500 2,500 25
January 0 0 0
Total Financing Cost = $200

Collins Systems, Inc., is trying to develop an asset financing plan. The frim has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also
has $400,00 in fixed assets.
A) Construct two alternative financing plants for the firm. One of the plans should be conservative,with 80% of assets financed by long term sources and the rest financed by
short term sources. The other plan should be aggressive,with only 30% of assets financed by short term sources.The current interest rate is 15% on long term funds and 10%
on short term financing. Compute the annual interest payments under each plan.
B) Given the Collin's earnings before interest & taxes are $180,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 40 %.
Solution:
Collins Systems Inc.
a. Temporary current assets $300,000
Permanent current assets 200,000
Fixed assets 400,000
Total assets $900,000

Conservative

% of Interest Interest
Amount Total Rate Expense
$900,000 x .80 = $720,000 x .15 = $108,000 Long-term
$900,000 x .20 = $180,000 x .10 = 18,000 Short-term
Total interest charge $126,000

Aggressive

% of Interest Interest
Amount Total Rate Expense
$900,000 x .30 = $270,000 x .15 = $ 40,500 Long-term
$900,000 x .70 = $630,000 x .10 = 63,000 Short-term
Total interest charge $103,000

Conservative Aggressive
b. EBIT $180,000 $180,000
Int 126,000 103,500
EBT 54,000 76,500
Tax 40% 21,600 30,600
EAT $ 32,400 $ 45,900