Assignment questions: 1. What are the market, competitive, and operating characteristics of Toy World? 2.

What are the characteristics of Toy World's need for external financing? What are the timing, magnitude and duratio 3. What will happen to Toy World's borrowing needs if it adopts level production? a) Conceputally, wha will happen? b) Prepare the pro forma financial statements and the cash budget to assess the borrowing requirements. 4. As a banker, would you provide the loan that Toy World will need if it adopts the level production? How attractive a p 5. Estimate the cost savings of shifting to level production. Are the cost savings sufficient to warrant adoption of level p 6. What other sources could substitute in part for bank borrowing? Explore each proposal you make in detail. 7. Should Toy World adopt the policy of level production?

are the timing, magnitude and duration of its borrowing needs? How certain are the forecasts?

he borrowing requirements. e level production? How attractive a piece of business is it for a bank? ufficient to warrant adoption of level production? proposal you make in detail.

Table A

Condensed Income Statements, 1991 - 1993 ($000) 1991 1992 6,167 4,440 1,727 1,542 75 15 125 43 83 34.0% 1993 7,967 100% 5,577 70% 2,390 30% 1,912 24% 85 1% 16 0% 409 5% 139 2% 270 3.4% 34.0% Shareholders' equity Total liabilities and equity WCR NLB NWC PPE, net LT debt Networth

Sales COGS Gross profit Operating expenses Interest expense Interest income Profit (loss) before taxes Federal Income taxes Net Profit marginal tax rate

5,213 3,597 1,616 1,199 68 20 369 125 244 34.0%

Table B

Balance Sheet as at Dec. 31, 1993 ($000) 200 2,905 586 3,691 1,176 4,867 282 752 88 50 1,172 400 3,295 4,867 3,121 (552) 2,569 1,176 3,745 450 3,295 39%

Table C

Monthly sales data ($000) 1993 64 88 96 88 87 95 96 1251 1474 1723 1965 940 7,967

Cash Accounts receivable Inventory Current assets Net plant and equipment Total assets Accounts payable Notes payable bank Accrued taxes Long-term debt, current portion Current Liabilities Long-term debt Shareholders' equity Total liabilities and equity WCR NLB NWC PPE, net LT debt Networth

January February March April May June July August September October November Dec

les data ($000) 1994 120 140 160 140 140 140 160 1620 1840 2140 2285 1115 10,000

Toy World, Inc. Exhibit 1 Pro forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars) Actual Dec.31 1,993 200 2,905 586 3,691 1,176 4,867
e

Casha b Accounts receivable c Inventory Current assets Net plant and equipmentd Total assets Accounts payable f Notes payable bank g Accrued taxes Long-term debt, current portion Current Liabilities h Long-term debt Shareholders' equity Total liabilities and equity

Jan. 878 1,060 586 2,524 1,176 3,700 36 0 31 50 117 400 3,183 3,700

Feb. 1,526 260 586 2,372 1,176 3,548 42 0 (23) 50 69 400 3,079 3,548

Mar. 1,253 300 586 2,139 1,176 3,315 48 0 (162) 50 (64) 400 2,979 3,315

Apr. 1,054 300 586 1,940 1,176 3,116 42 0 (251) 50 (159) 400 2,875 3,116

May 915 280 586 1,781 1,176 2,957 42 0 (305) 50 (213) 400 2,770 2,957

June 696 280 586 1,562 1,176 2,738 42 0 (394) 50 (302) 375 2,665 2,738

July 527 300 586 1,413 1,176 2,589 48 0 (448) 50 (350) 375 2,564 2,589

Aug. 200 1,780 586 2,566 1,176 3,742 486 433 (352) 50 617 375 2,750 3,742

Sept. 200 3,460 586 4,246 1,176 5,422 552 1,741 (271) 50 2,072 375 2,975 5,422

Oct. 200 3,980 586 4,766 1,176 5,942 642 1,745 (126) 50 2,311 375 3,256 5,942

Nov. 200 4,425 586 5,211 1,176 6,387 686 1,677 33 50 2,446 375 3,566 6,387

Dec. 200 3,400 586 4,186 1,176 5,362 334 942 40 50 1,366 350 3,646 5,362

282 752 88 50 1,172 400 3,295 4,867

a Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out of debt. b Assumed 60-day collection period c Assumed inventories inventories maintained at December 31, 1993 level for all of 1994 d Assumed equipment purchases equal to depreciation expense. e Assumed equal to 30% of the current month's sales and related to material pruchases of $3,000,000 for 1994 as against sales of $10 million. This represents a 30-day payment period. Since inventories are level, purchases will follow seasonal pattern. f Plug figure. g Taxes payable on 1993 income are due on March 15, 1994. On April 15, September 15, and December 15, 1994, payments of 25% each of the estmated tax for 1994 are due. In estimating its tax liability for 1994, the company has the option of using the prior year's tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the company could estimate its 1994 tax liability directly. Toy world planned to use its prior year's tax liability as its estimate and to pay $35,000 in April, June, September, and December. h To be repaid at the rate of $25,000 each June and December.

Exhibit 2

Pro Forma Income Satement Under Seasonal Production, 1994 (thousands of dollars) Jan. 120 84 36 200 7 2 (169) (57) (112) Feb. 140 98 42 200 4 4 (158) (57) (101) Mar. 160 112 48 200 4 5 (151) (51) (100) Apr. 140 98 42 200 4 4 (158) (54) (104) May 140 98 42 200 4 3 (159) (54) (105) June 140 98 42 200 4 3 (159) (54) (105) July 160 112 48 200 3 2 (153) (52) (101) Aug. 1,620 1,134 486 200 5 1 282 96 186 Sept. 1,840 1,288 552 200 12 1 341 116 225 Oct. 2,140 1,498 642 200 17 1 426 145 281 Nov. 2,285 1,600 685 200 17 1 469 159 310 Dec. 1,115 780 335 200 14 1 122 42 80 Total 10,000 7,000 3,000 2,400 95 28 533 182 351

Net Sales Cost of goods solda Gross profit Operating expensesb Interest expense Interest incomec Profit (loss) before taxes Income taxesd Net Profit

a Assumed cost of goods sold equal to 70% sales. b Assumed to be same for each month throughout the year. c Toy World expected to earn a 4% annualized rate of return on average monthly cash balances. d Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheet. The federal tax rate on all earnings was 34%.

MicroDrive Inc.: Cash Budget (Millions of Dollars) May June I. COLLECTIONS AND PURCHASES (1) Sales (gross) 200 250 Collections (2) During month of sales [0.2] [0.98] [month's sales] (3) During first month after sales [0.7] [month's sales] (4) During second month after sales [0.1] [month's sales] (5) Total collections [2 + 3 - 4] Purchases (6) 0.7 (next month's sales) 210 (7) Payment (Prior month's purchases) II. CASH GAIN OR LOSS FOR MONTH (8) Collections (Section I) (9) Payments for purchases (10) Wages and salaries (11) Lease payments (12) Other expenses (13) Taxes (14) Payments for plant construction (15) Total payments (16) Net cash gain or loss during the month III. LOAN REQUIREMENT OR CASH SURPLUS (17) Cash at BoM if no borrowing is done (18) Cash at EoM if no borrowing is done (19) Target cash balance Cumulative surplus cash or loans outstanding

July 300

Aug 400

Sep 500

58.8 175 20 253.8 280 210 253.8 210 30 15 10

78.4 210 25 313.4 350 280 313.4 280 40 15 15

98 280 30 408 245 350 408 350 50 15 20 30 465 -57 -32.8 -89.8 10 -99.8

265 -11.2 15 3.8 10 -6.2

350 -36.6 3.8 -32.8 10 -42.8

Oct 350

Nov 250

Dec 200

1 month 2 months later

20% 70% 10%

68.6 350 40 458.6 175 245 458.6 245 40 15 15 100 415 43.6 -89.8 -46.2 10 -56.2

49 245 50 344 140 175 344 175 30 15 10

39.2 175 35 249.2

140 249.2 140 30 15 10 20 215 34.2 67.8 102 10 92

230 114 -46.2 67.8 10 57.8