Cash Budget

Cash Budget
1. ABC Ltd. a newly started company wishes to prepare Cash Budget from January. Prepare a cash
budget for the first six months from the following estimated revenue and expenses.
Month Total Sales Material Wages overheads
Production Selling & distribution
January 20,000 20,000 4,000 3,200 800
February 22,000 14,000 4,400 3,300 900
March 28,000 14,000 4,600 3,400 900
April 36,000 22,000 4,600 3,500 1,000
May 30,000 20,000 4,000 3,200 900
June 40,000 25,000 5,000 3,600 1,200
Cash balance on 1st January was 10,000. A new machinery is to be installed at 20,000 on credit,
to be repaid by two equal instalments in March and April, sales commission @5% on total sales is
to be paid within a month following actual sales
10,000 being the amount of 2nd call may be received in March. Share premium amounting to
2,000 is also obtained with the 2nd call. Period of credit allowed by suppliers — 2months; period
of credit allowed to customers — 1month, delay in payment of overheads 1 month. delay in
payment of wages ½ month. Assume cash sales to be 50% of total sales.
2. Prepare a Cash Budget for the three months ending 30th June, 2016 from the information given
below:
(a)
Month Sales Material Wages Overheads
February 14,000 9,600 3,000 1,700
March 15,000 9,000 3,000 1,900
April 16,000 9,200 3,200 2,000
May 17,000 10,000 3,600 2,200
June 18,000 10,400 4,000 2,300
Wages payment in each month is to be taken as three-fourths of the current month plus one-
fourth of the previous month.
(b) Credit terms are:
Sales/debtors: 10% sales are on cash, 50% of the credit sales are collected next month and the
balance in the following month.
Creditors: Materials 2 months
Wages 1/4 month
Overheads 1/2 month.
(c): Cash and bank balance on 1st April 2016 is expected to be 6,000.
(d): other relevant information are:
i. Plant and machinery will be installed in February 2016 at a cost of 96,000. The
monthly instalment of 2,000 is payable from April onwards.
ii. Dividend @ 5% on preference share capital of 2,00,000 will be paid on 1st June.
iii. Advance to be received for sale of vehicles 9,000 in June.
iv. Dividends from investments amounting to 1,000 are expected to be received in June.
Case Study: Ragan Engines.
Larissa has been talking with the company’ directors about the future of East Coast Yachts. To this point,
the company has used outside suppliers for various key components of the company’s yachts, including
engines. Larissa has decided that East Coast Yachts should consider the purchase of an engine
manufacturer to allow East Coast Yachts to better integrate its supply chain and get more control over
engine features. After investigating several possible companies, Larissa feels that the purchase of Ragan
Engines, Inc., is a possibility. She has asked Dan Ervin to analyze Ragan’s value.
Ragan Engines, Inc., was founded nine years ago by a brother and sister- Carrington and Genevieve Ragan-
and has remained a privately-owned company. The company manufactures marine engines for a variety
of applications. Ragan has experienced rapid growth because of a proprietary technology that increases
the fuel efficiency of its engines with very little sacrifice in performance. The company is equally owned
by Carrington and Genevieve. The original agreement between the siblings gave each 1,50,000 shares of
stock.
Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan has gathered
the following Information about some of Ragan’s competitors that are publicly traded:
EPS DPS Stock Price ROE R

Blue Ribband Motors Corp. $1.09 $0.19 $16.32 10.00% 12.00%
Bon Voyage Marine, Inc. 1.26 0.55 13.94 12.00 17.00
Nautilus Marine Engines (0.27) 0.57 23.97 N/A 16.00
Industry average $0.69 $0.44 $18.08 11.00% 15.00%
Nautilus Marine Engines’s negative earnings per share (EPS) were the result of an accounting write-off
last year. Without the write-off, EPS for the company would have been $2.07. Last year, Ragan had an EPS
of $5.35 and paid a dividend to Carrington and Genevieve of $320,000 each. The company also had a
return on equity of 21%. Larissa tells Dan that a required return for Ragan of 18% is appropriate.
1. Assuming the company continues its current growth rate, what is the value per share of the
company’s stock?
2. Dan has examined the company’s current financial statements, as well as examining those of its
competitors. Although Ragan currently has a technological advantage, Dan’s research indicates
that Ragan’s competitors are investigating other methods to improve efficiency. Given this, Dan
believes that Ragan’s technological advantage will last only for the next five years. After that
period, the company’s growth will likely slow down to the industry average. Additionally, Dan
believes that the required return the company uses too high. He believes the industry average
required return is more appropriate. Under Dan’s assumptions, what is the estimated stock price?
3. (5) : Assume the company’s growth slows to the industry average in five years. What future return
on equity does this imply?
GoNatural Cosmetics Ltd (GoNatural, hereafter) sells its personal care products through a network of
beauty parlours and beauticians. Following a review of its sales strategy the management of GoNatural
estimated that if it were to increase the collection period from its current level of 60 days to 90 days, its
sales would increase from the current level of Rs 36 lakh per annum to Rs 42 lakh per annum. You are
further told that the level of sales would be uniform throughout the year. The company enjoys a healthy
contribution margin of 40% on sales and an operating margin of 20% after meeting annual fixed costs of
Rs 5 lakhs. These fixed costs would not be affected by the proposed increase in sales; i.e., it would remain
at the current level of Rs 5 lakh. The management of GoNatural realizes that the increase in profits due to
the higher sales would be offset to a certain extent by the increase in the cost of the higher investment in
the receivables. GoNatural finances a part of its current assets, like most other Indian businesses, through
bank borrowings that carried an interest of 12% per annum, while the company’s opportunity cost of
funds was 15%. Should the management of GoNatural go ahead with increasing the collecting period?
Explain the workings.

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EPS DPS Stock Price ROE R

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