Philippine Christian University – Manila

Graduate of School Business and Management

Master’s in Business Administration (MBA)

In Partial Fulfillment of the Course Requirement in

Finanzverwaltung
2nd Term, Academic Year 2019-2020

Submitted To:
Prof. Armando B. Bo, CPA

Submitted By:
Engr. Gerald M. Garces

August 15, 2020

Answer to Guide Questions
I. Case 15-2 Michael Jordan’s Value and possible Contract Offer from
Chicago Bulls

1. To come up with possible alternative salary options to re-sign Michael

Jordan to the league
Option No. 1 – Offer Michael Jordan $28 million for a two-year contract or
$14 million a season based on the other team’s possible offer.
Team Alternative Salary

New York Knicks $34.6 million for a three-year

contract or S11.5 million a season

Orlando Magic $55 million for a four-year contract

oder
$13.7 million a season

Option No. 2 – Offer Michael Jordan $53.4 million (30% of $178 million) for a
two-year contract or $26.7 million a season based on the current value of
Chicago Bulls at $178 million according to the latest Financial World survey
of professional sports team.

Option No.3 – Offer Michael Jordan $29.2 million for a two-year contract or
$14.5 million a season based on the present value of the available relevant
cash flows using the long-term investment rate of 10% prevailing in the US
during the playing years of Jordan.

2. To identify the cash flows relevant to the assessment of the value of

Michael Jordan to the Chicago Bulls
Year Type of Cash Flow Cash flow
1984-85 Net revenue from gate receipts- $8,300,000.00
rookie year
1985-86 Net revenue from gate receipts- 8,500,000.00
played only 18 games
1986-87 Net revenue from gate receipts- 13,100,000.00
played full year
1987-88 Net revenue from gate receipts- 16,400,000.00
 played full year
1987-88 to Playoffs 59,200,000.00
1995-96
1995-96 Increase in the licensing revenues 44,000,000.00
Total Relevant Cash Flows $149,500,000.00

3. To estimate the present value of Michael Jordan’s exciting plays to the

Chicago Bulls
Jordan’s Current Fair Value to the Chicago Bulls Franchise is $97,209,287.74
multiplied by 30% due to his point contribution for the entire team.
Offer to Michael Jordan for a two-year contract $29,162,786.32

Year Type of Cash Flow Cash flow

1984-85 Net revenue from gate $8,300,000.00

receipts-rookie year

1985-86 Net revenue from gate 8,500,000.00

receipts-played only 18
games

1986-87 Net revenue from gate 13,100,000.00

receipts-played full year

1987-88 Net revenue from gate 16,400,000.00

receipts-played full year

1987-88 to Playoffs 59,200,000.00

1995-96

1995-96 Increase in the licensing 44,000,000.00

revenues

Total Relevant Cash Flows $149,500,000.00

Net Present Value1 $97,209,287.74

Multiply: Percentage share to team’s points 30%

per game

1
For easier computation, this can be computed in Microsoft Excel using the functional formula, Net Present
Value, which is NPV(rate,values).
 Offer to Michael Jordan for a two-year contract $29,162,786.32

4. To determine how much should the Chicago Bulls offer to pay Michael
Jordan for the next two years based on his contribution to the financial
success of the team

The best option is Option No. 2 - Offer Michael Jordan $53.4 million (30% of
$178 million) for a two-year contract or $26.7 million a season based on the
current value of Chicago Bulls at $178 million according to the latest
Financial World survey of professional sports team.
Due to its advantages and limited disadvantages, Option No.2 is the best option
since it will surely make Michael Jordan stay with the Chicago Bulls.

II. Financial Ratio Analysis

  Seacraft Company Financial Statements          

  19x2 and 19x3          
  (In thousand pesos)          
             
  INCOME STATEMENT   19x3 19x2    

  Net Sales   106,000 172,070    

  Cost of Goods Sold   97,200 83,800    

             
  BALANCE SHEET   12/31/19x3 12/31/19x2    

  Accounts Receivable   17,450 15,800    

  Inventory   18,100 14,950    

  Total Current Assets   61,300 48,670    

  Total Current Liablities   33,500 26,200    

             
  Calculate the following figures:          
  a) Working Capital          
             
  Answer: Working capital amounted to PHP 27.8 million in 19x3 and PHP 22.5 million in 19x2  
             
    In Thousand Pesos      
    12/31/19x3 12/31/19x2      
   Total Current Assets 61,300 48,670      

  Total Current Liablities 33,500 26,200      

  Working Capital 27,800 22,470      

             
  b) Increase in working capital          
             
  Answer: Working capital increased by PHP 5,330,000.        
In Thousand Pesos
Increase
19x3 19x2 (Decrease)
Working Capital 27,800 22,470 5,330

c) Accounts Receivable (AR) Turnover

Answer: AR Turnover for 19x3 is 6.38. We cannot compute for 19x2 since there is insuffi cient data (i.e. no beginning balance fo 19x2)

Ending balance of AR, 12/31/19x3 17,450 Net Sales in 19x3* 106,000

Add: Beginning balance of AR, 12/31/19x2 15,800 Divided by: Average AR Balance for 19x3 16,625
33,250 AR Turnover for 19x3 6.38
Divided by: Two 2
Average AR Balance for 19x3 16,625 *Assuming that Net Sales are all on credit

d) Inventory Turnover

Answer: Inventory Turnover for 19x3 is 6.38. We cannot compute for 19x2 since there is insuffi cient data (i.e. no beginning balance fo 19x2)

Ending bal. of Inventory, 12/31/19x3 18,100 COGS in 19x3 97,200

Add: Beginning bal of Inventory, 12/31/19x2 14,950 Divided by: Average Inventory Bal. for 19x3 16,525
33,050 Inventory Turnover for 19x3 5.88
Divided by: Two 2
Average Inventory Balance for 19x3 16,525

III. Working Capital Policy and Management

Problem 9-A11: Role of short-term bank loan

A. Calculate the net working capital and current ratio of Good Earth Poultry.
Net Working Capital 660,000.00
Current Ratio 2.57
B. If sales increase to P6 million, what will happen to current ratio? Ignore any
possible effects of profits.
Current ratio will increase from 2.57 to 3.08.

C. If sales fall to P3 million, what will happen to current ratio? Ignore any possible
efects of profits.
Current ratio will decrease from 2.57 to 2.00.
D. Suppose that sales increased by 20 percent and Good Earth Poultry wanted to
keep its current ratio to the present level, how much additional bank loan can it
afford? Is this amount within the existing credit limit? How was the increase in
current assets financed?
If sales increased by 20% and the company wanted to keep its current
ratio at 2.57, the company must increase its bank loan from 260,000 to 312,000.
This amount is not within the existing credit limit with the bank, but they may
request the bank to increase its credit limit.
E. Suppose that sales increased by 15 percent and Good Earth Poultry wanted to
finance all of the increase in current assets with a bank loan, how much additional
bank loan would the company need? What will happen to the current ratio?
If sales increaed by 15% and the company wanted to finance all of the
increase in current assets with a bank loan, the company must increase its
loan from 260,000 to 422,000. The current ratio will decrease from 2.57 to 1.78.
GOOD EARTH POULTRY COMPANY
E
D
Percentage
A B C (Sales increased (Sales increased (If all increase in C/A will
of Sale
by 20%) by 15%) come from a bank loan)

Sales 4,400,000.00 6,000,000.00 3,000,000.00 5,280,000.00 5,060,000.00 5,060,000.00

Current Assets
Cash 60,000.00 0.01 81,818.18 40,909.09 72,000.00 69,000.00 60,000.00
Receivable 120,000.00 0.03 163,636.36 81,818.18 144,000.00 138,000.00 120,000.00
Inventory 900,000.00 0.20 1,227,272.73 613,636.36 1,080,000.00 1,035,000.00 900,000.00
Total C/A 1,080,000.00 0.25 1,472,727.27 736,363.64 1,296,000.00 1,242,000.00 1,080,000.00
Total C/A based on
percentage of sale - the given
Total C/A 162,000.00
Current Liabilities
Accounts Payable 160,000.00 0.04 218,181.82 109,090.91 192,000.00 184,000.00 184,000.00
Bank Loan 260,000.00 0.06 260,000.00 260,000.00 312,000.00 260,000.00 422,000.00
Total C/L 420,000.00 0.10 478,181.82 369,090.91 504,000.00 444,000.00 606,000.00

Net Working Capital 660,000.00 994,545.45 367,272.73 792,000.00 798,000.00 474,000.00

Current Ratio 2.57 3.08 2.00 2.57 2.80 1.78

IV. Prob 10-B8 Fund Generation and cash cycles

a) Ave. Cash Operating Cycle = Days of Sales Outstanding + Days of
Inventory Outstanding
= 14 days + 14 days
= 28 days
Cash Turnover = revenue / cash
= 6,000 x 6/ 52,000
= 36,000/52,000
= 0.69
b) Cash tied up as working capital
= 6,000 / 60 days x 28 days
= 2,800
c) Reduction in inventory to 3 days from 14 days
= (6000/60) x 9 days
 = 900
Cash Term
= (6000/60) x 14 days
= 1,400
d) No, total cash income from sale and savings in float days is only 8,300.
e) Yes, if they still have cash on hand or unused proceed from the loan. It is
also worth noting that Samal Tambo Crafts has a P52,000 cash
requirement per year, which can be used to facilitate the normal
transactions of the business.

V Cost of Carrying Accounts Receivables and Aging Schedules

a) What were the cost of giving credit to Good Distributor’s customers?

Bad debts, interest cost, opportunity costs, administrative costs, and

miscellaneous costs.
ACCOUNTS RECEIVABLES
AUGUST 31

MONTH AMOUNT % OF TOTAL AR AMOUNT UNCOLLECTIBLE % UNCOLLECTED

June 1,050,000.00 46% 30,000.00 2.86%
May 500,000.00 22% 105,000.00 21.00%
April 230,000.00 10% 116,760.00 50.77%
March and prior 520,000.00 23% 114,220.00 21.97%
TOTAL 2,300,000.00 100% 365,980.00 15.91%

CURRENT 1-30 DAYS 31-60 DAYS 61-90 DAYS 91-120 DAYS TOTAL
June 1,050,000.00 1,050,000.00
May 500,000.00 500,000.00
April 230,000.00 230,000.00
March and prior 520,000.00 520,000.00
TOTAL - 1,050,000.00 500,000.00 230,000.00 520,000.00 2,300,000.00
UNCOLLECTIBLE - 30,000.00 105,000.00 116,760.00 114,220.00 365,980.00
COLLECTIBLE - 1,020,000.00 395,000.00 113,240.00 405,780.00 1,934,020.00

COST OF CARRYING RECEIVABLES

Principal amount 1,050,000.00 500,000.00 230,000.00 520,000.00 2,300,000.00
Multiply by: interest rate 12% 12% 12% 12% 12%
Interest should be earned 126,000.00 60,000.00 27,600.00 62,400.00 276,000.00
Divided by: 365 days 365.00 365.00 365.00 365.00 365.00
Daily earnings 345.21 164.38 75.62 170.96 756.16
Multiply by: number of days the debt is overdue 60.00 90.00 120.00 150.00
Cost of carrying receivables (overdue) 20,712.33 14,794.52 9,073.97 25,643.84 70,224.66

b) Estimate the total cost of the company’s credit policy.

70,224.66

c)      Comment on the efficiency of management in: collecting and controlling

bad debts.
 The management is inefficient in collecting its receivables since all of
its outstanding receivables are already beyond 30 days (its normal
credit term) despite the fact that all the sales in July were collected by
the management in August (since no receivables for shipments in
July). Moreover, it can be observed that the management is not
properly monitoring its receivables which likely resulted to non-
collection on due dates and long overdue accounts. Based on the
aging of receivables, 46% of receivables are 30 days overdue, 22% are
60 days overdue, 10% are 90 days overdue and 23% are 120 days
overdue. Moreover, it is highly likely that 15.91% of the outstanding
receivables are uncollectible since the customers already closed their
stores. The longer the receivables are outstanding and overdue, the
higher the risk of non-collection for the company.

VI. PROBLEM SOLVING 12-B9 Economic order quantity and reorder point

The Box Company used 40,000 kg. of heavy duty staples per month. The cost
of carrying staples as inventory was P3.14 per kg. per year. Every order of the
staples P1,300. The company used staples for cardboard boxes that it produced at a
constant rate. It wanted to keep stocks because the supplier took 21 days to deliver.
Questions:
a) What was the economic order quantity for staples?
b) At what level of inventory of staples should Box Company reorder?

Answers:
a) Economic order quantity for staples
Formula:

EOQ= √
2 x D x Co
Ch
Where:
D= Demand per year
Co = Cost per order
Ch = Cost of holding per unit of inventory

GIVEN
Where:
 D= 480,000 (40,000 kg. X 12 months)
Co = P1300
Ch = 3.14

EOQ= √
2 x 480,000 x 1300
3.14

EOQ=
√ 1,248,000,000
3.14
EOQ=√397,452,229.30
EOQ=19,936.20

b) At what level of inventory of staples should Box Company reorder?

Reorder Point Formula:
ROP = Average daily usage X Lead time in days
Where:
Average daily usage = 40,000/ 30 days

Lead time in days = 21 days

Answer:
ROP = 1,333.33 X 21 days
ROP = 28,000

* The inventory reorder point is 28,000 kg. If the level of stocks for this item falls
below that number, the new order should be placed immediately. Each time the Box
Company stock hits 28,000 kg. staples, the company would send a purchase order
to their staple supplier.

VII. 13A-19 PROFORMA BALANCE SHEET WITH CHOICE OF FINANCING

1.Prepare a forecast balance sheet for 19x2 using the percentage of sales method.
 HAVALARI, INC
FORECASTED BALANCE SHEET
AS OF DECEMBER 31, 19X1

19x1
(GIVEN) 19x2

Cash 300,000.00 0.04 450,000.00 0.04 Percentage of Sale

A/R 650,000.00 0.08 975,000.00 0.08 Percentage of Sale

Inventory 400,000.00 0.05 600,000.00 0.05 Percentage of Sale

Total C/A 1,350,000.00 2,025,000.00

Net Fixed Asset 4,200,000.00 0.53 6,300,000.00 0.53 Percentage of Sale

Total Assets 5,550,000.00 8,325,000.00

A/P 300,000.00 0.04 450,000.00 0.04 Percentage of Sale

Accrued Expense 50,000.00 0.01 75,000.00 0.01 Percentage of Sale

Bank Loan 150,000.00 2,212,500.00 Squeezed from asset less "AP+Accrued Expense+Equity"
Total C/L 500,000.00 2,737,500.00
Long term debt 1,000,000.00 1,103,703.70 0.25 to maintain debt to equity ratio
Common Stock 3,000,000.00 3,000,000.00 Same, owner does not want to issue additional stock
Retained Earnings 1,050,000.00 1,470,000.00 Retained earnings 19x1 plus Net Income After Dividend
Total Liab and Equity 5,550,000.00 8,311,203.70

HAVALARI, INC
FORECASTED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 19X2

19X1 19X2
SALES 8,000,000.00 100% 12,000,000.00 Forecasted and Given in the problem
COGS and Operating Expense 7,600,000.00 95% 11,400,000.00
Net Profit 400,000.00 5% 600,000.00
Less Dividends of 30% 120,000.00 180,000.00
Net Incom After Dividend 280,000.00 420,000.00

2. Evaluate the financial position of the Havalari Inc, as of December 31, 19x2
compared to previous year. What risk the Company face in 19x2 assuming that it
achieves its sales target.
Based on the forecasted balance sheet of Havalari Inc for 19x2, to support the
company's target to increase its sales by 50% without issuance of additional
common stock and mantaining the 0.25 long term debt to equity ratio, short
term bank financing will be the next choice for source of fund. As shown
above, bank loan with beginning balance of P150,000 became P2,212,500 as
of December 19x2. However, availing short term financing will also require the
company to produce enough cash within the year to payoff the loan upon
maturity. But based on the forecasted data, Havalari Inc, may not be able to
meet its payment obligation as they will only have P450,000 of cash by the
end of 19x2.