hello , please i need your help in questions 3 and 9 , I solved all questions exept these parts , thank you ...

CASE11 TIPTON ICE CREAM FINANCIAL FORECASTING George Tipton began dre Tipton IceCream Company nea1ly five decades ago' i" plt"r,tla a sofiiceueam and right from the outset paid special attention to qrruiity "We only make one prodult, but-we make it in many flavors and we mut" it well," Tipton was fond of saying' The company was an immediate success and sales quickly reached seven figures' DEBT AVERSION The firm expects strong growth in the coming yeat (7996) and Brenda Hood' iiptorr,, chlef financial"ofiicer, hopes she can make a strong case for borrowing to'finance the company,, "*prrrri,or,. she-realizes, however, that she is likely to i""" ttiff opposition from the Tipton family' GeorSe Ti{gn' perhaps unduly influe.rc"d U/rfru Great Depression of the 1930s, detested borrowing money and f,i, *otto *u, j,Nurru, u lender norborrowerbe." For nearly 25 years all the companv,s stock was owned by thg Tipton family, but due to expansionnew shares t;;:;;;;lJ d.rri^g the iast 15 ylars to individuals outside the familv' Bv 1e95 in" fip,o. family owis 60 p"r."rrt of all shares, and although the family has not be"n ,rery activl in ,rr,,.,i.g the firm, it does insist on one family tradition: .Never a lerder nor borrowEr be." To this day Tipton has never owed anything beyond its accounts-payable and accruals' Hood knows this is an extreme case'of debt aversion and the policy has hurt the ownets'profits. For example, historically Tipton.has been slightly ub()":- tl" ihdustry urr"rug" in return on totul assets but consistently below in return on o*.r"r,, uqrrity.-At each annual meeting she has tried unsuccessfully to convince ifr" iipto"'.Iar, to use more debt. And each year Hood heard a chorus of "Never a lender. . . ." But perhaps this year would be different' She recalls two sessions on financial management that she held for the nonfinancial executives of Tipton. Some memb"tt-of th" Tipton family had attended - 70 PAI1T III FINANCIAL PLANNING tlrese sessions. She explait]ed that u'hen:i1::]:.:i:"-'""j::::':1:,",:fi]'iillili I::".,:T;:1"".:"';:;X.,';;;'i.,.,"n,' !""11:l,,i:1i..:.,::;::1if,:J;:1i:.: :;::ilf ;;Til:F+:.irilrirli j**,:T: j.'il:';f ;::::"#["i"1',',",: :r5ffi'iJ1::,Xl:xi::ffi ::',:i"::;":':.,r."?::.::1,Ti,iTT,il'il:ffi ::::1 ::Tll*;:#"T::"''ffJTii!";H:J,*.:l::::::::it::,:l'Hi1"#i::il: deiermine the magnttttde oI tne I urtu) rtcLuw^:'^-,-; o\.n^qr1re- and she recalis il";ffi; ?rr,.,ily"nua-received o:ll^f ot*u' financial exPosure' ar in"1' .L"*"a interested "id "l*-l*'-t-"; ffi l;iil::fTffi fi "i:Hx**liii]:::i:ii':if, ,1il,,,,fr ::1J: ,. "*1 jiTJl:li:H;:ili: :':::Ix;':;;'-G e' i "o' " s h e tiiink s "' \vh v n o t? " FORECASTING ASSUMPTIONS she decides to estimate (1) the amount of funds Tiptol will,have to obtain in 1996; (2) trre Lgg6income stateme'nt u"t'*it'g 'it :t :T-itlTcing is done through borrowing; "li tal another-income staLment assuming all new stock is issued. To help * ifi"'"r,*tes Hood ""fit" Frank Davis, a recent MBA' Davis reminds her ,r.,"iiroo 3t "xpected.to f" " uig year forthe company; sales are predictea to n"'i";;t1't"d;i' p"" * tnilttottg demand' marketing feels any "ost ittc'eases tu'1'eu'ity be passed on' Consequently' the gross marsin should exceed. tt u .r.r".,t lever oflzt percent. Hood notes that the sales-to- ,lnventory ratio wilt- u"^lo*"r"a ,o o.s, ur,J that purchases should total g1 01,481,000. I''i"'g!l;;;; ;i. goods f or 1ee6 would be $e3'750'000' "What about adminitrative and-selli"g "*pu*"s?" Hood asks Davis' He informs her that management salarie, *orlJ liave to rise sharply because these salari6s had ir',"r"u'"f,""ry slightly "":t tl;;;tt three y:-t: -?1:it believes a 20 percent increase * ';*;;;;'ivJ and selting expenses is reasonable' Fixed assets are r#ry;;;h;"g" st,arpty in"tt",e coming year. Currently, Tipton is operating "o*"", i"J'6;""ft ai{'"a ; "*p"'i"i l' ':T*y"?}i}1 thus extra capacity #iriu" "t"aed' in.addition' some maior imprt isting equip*"rrt *iiit lrr"io uu *uae in order for the comPany to rernain competitive. The planning for these tftllSes f t3s Uu"" u"ti"ipated for some time' and inougtr all of these ;fl;;g", do not hlve a u" ,",ra" in1996, it is clear that the company cannot il;;"";Jrqgo wirt ouirr,"r". In any event, it is urgent that the financing q'""'; l"-tu'ot""a u' 'oo" ^t possible' A reasonable estimate is that Tipton *il p"Ittu"'" is t"ilf"" d1:* plant and '"q"11-T:l' in1996' "During the past year w-e've been a bit sllw in paying our suppliers"' Hood remarks. "We definiiely will have to puy *ot" ptt*ptty tl we're going to have some annoy"a .r"alll7r,;ilr;"ri;t'.k;;;;fi discounts bv Pavins earlier' see if you can "o*" 'p *ith'an estimatl "f t'lt f'tables using pist information'" Hood and D'"i' ;i;;;;i inut o'"' tr''"-iu'l fJ* y"u" factors (other than sales) affecting accruals ,#"r;Jt""bles have u""" r.rr,i"ely consta{It' For example' the company hr, #;;r"d ti, "i"ait policv in the lastihree years' Nor can they think of uI1y r.u'o"#n|;;;;*t tr-tt"i'a "n*ge significantly in the coming ---/. CASE 1I TIPTON ICE CREAM 7L year. "Of cou rse, an exact relationship between each of these and sales is unlikely to exist," Hood cautions. "We can exPect some yearly random fluctuation. And keep in mind the 'big/little' mix will be changing since we'll be selling to smaller food chains. This has implications for our receivables since these firms are relatively slow to pay. This shouldn't be a major factor, Frank, but it is something you should be aware of when you make your estimate-" Hood and Davis think the cash management of the firm has been a "bit sloppy" over the past few years, and both agree the company could make do with a lower level of liquidity. Davis suggests he assume a level of 2 percent of sales, which is the approximate industry average, and Hood agrees. "What about dividends?" Davis asks Hood. "Our payout ratio is usually around 50 percent. Howeve{, if we borrow all the extra money, let's work backwards on the dividends; that is, out of net income subtract the amount of the retained earnings we would obtain if we used all-equity financing." FORECASTING N#STNTC"iTON S to There are two final problems. lvVhile Hood believes the comPany should use more debt, she recognizes that the final decision rests with the Tipton family. Given their debt aversion it is important that any projections not appear too debt-hear.y. She also wonders how much flexibility she would have to use shortterm debt, assuming the decision to borrow is made. Hood, therefore, instructs Davis to work within the following constraints when doing the forecast. As working hypotheses she wants Tipton',s debt ratio to remain below 0.5, and the current and quick ratios must not fall below 2 and L, respectively. In other words, the financial projection cannot violate any one of these restrictions. "Given these limitations, see how much flexibility we have in raising any funds needed," Hood tells Davis. QUESTIONS 1. Project tine 1996 income statement assuming no borrowing. 2. Project Tipton's 1996 balance sheet assuming no borrowing. 3. Explain hor,r, the $93.75 million cost-of-goods estimate for 1996 was obtained. 4. How much money will Tipton need to raise in 1996? 5. (a) How much of this money can Tipton borrou, long term rvithout violating the constraints imposed by Hood? --f ?z PART 111 FINANC]IAL PLAN^N I N(] (b)Horvnrtrclrofthisnroneycanberaisedusingnotespayablel'vitiroutr,iolating these constraints? 6. Rerlo thc. 199t- income statement assuming ail of the funds needed are borrorved as long-term boncls at 8 percent. (Keep retained earnings at the sarne 1evel as in question 1.) 7. \{i11 the Tipton family or,r,n less tiran 50 pelcent of the fir.m's stock if no funds are borror.r,ed? (Assume shares are sold to nonfamilv members at $11.50 per sirare, n'hich nets $10.50 after brokerage fees') g. Calculate the clir.iderrd per share and earnings per share if the expansion is (a) Financed bv nerv equitl'. (h) Financetl hv borror,t'in8. g. Use the percent of sales method to forecast the amount of financing. why does this estirnate differ from your answer in question 4? 10. (a) when making 4'financial forecast, which one of the items that must be estimated is thd most important? Why? (b) which item do you think is typically the most difficult to forecast? 11. (a) what are some ratios you n ould calculate to help determine the risk of using debt? (b) Play the role of a consultant. Industry avelages for all categories of ratios are given in Exhibit 3. Based on your previous anstrvers, the ratios calculatJd in part (a), and these industry a'erages, r.t ould you endorse the debt financing if you lvere a member of the Tipton family? Expiain.