Accounting Decision Making

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After seeing the tremendous popularity of the Ziptrekzipline in Vancouver during the Winter Olympics, a Toronto company is planning to build a similar attraction. $12,000,000 in new capital will be required. Currently,the financial structure of the company includes:

$3,000,000 of 6% bonds
$5,000,000 of 7% cumulative preferred stock
3 million shares of common stock at a book value of $12,000,000
Retained earnings of $900,000.

The following three alternatives can be used to provide the $12,000,000 required for the project.

i) $8 million in 5.5% bonds and $4 million in common stock at $12.50/share
ii) $10 million in 5.6% bonds and $2 million in 7.5% cumulative preferred
iii) $12 million in 5.7% bonds.

The company has forecasted earnings before taxes for 2010 of $4,000,000. The firm’s tax rate is 50%. Which alternative should they choose and why?

2.) Prepare a cash budget for Champion Limited for the months of June, July, and August, 2010. The firm wishes to maintain, at all times, a minimum cash balance of $55,000. Determine whether or not borrowing will be necessary during the period and, if it is, when and for how much. Also assume that any excess cash balances at month-end will be used to pay down any borrowing from previous months. As of May 31, the firm had a cash balance of $62,000

Actual Sales Forecasted Sales

April $ 80,000 June $50,000
May $140,000 July $39,000
August $60,000

Accounts Receivable: All sales are made on account. 60% of accounts receivable are collected in the month of sale, 30% in the next month, and 10% in the next month.

Purchases: 40% of each month’s sales. 50% paid in the month of occurrence, 30% in the following month, and 20% in the next month.

Proceeds from sale of property: $25,000 cash sale received in July.

Selling and administrative expenses: $14,000 per month

Interest payments on long-term debt: $20,000 due to be paid on July 15.

Dividends: $4,000 paid on August 3

Capital expenditures for new equipment: $60,000 in June, $20,000 in August.

Taxes: $2,000 due in July.

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