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- Addisalem Auto Spare Parts reported net income of 90,000 Br in 2002 from sales of 1,800,000 Br. Assets were fully utilized. - Projected 10% sales growth in 2003 will require additional financing for assets (AFN) to maintain full capacity. - The document provides financial statements and requests calculations to determine AFN using pro forma and formula methods, and analyze effects of financing options on common stock, retained earnings, interest expense, and AFN.

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Abdii Dhufeera
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520 views

Problem

- Addisalem Auto Spare Parts reported net income of 90,000 Br in 2002 from sales of 1,800,000 Br. Assets were fully utilized. - Projected 10% sales growth in 2003 will require additional financing for assets (AFN) to maintain full capacity. - The document provides financial statements and requests calculations to determine AFN using pro forma and formula methods, and analyze effects of financing options on common stock, retained earnings, interest expense, and AFN.

Uploaded by

Abdii Dhufeera
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Problem

You are given below the condensed balance sheet and income statement of Addisalem
Auto Spare Parts, PLC for 2002
Balance sheet as of December 31,2002
Cash -------------------------Br. 90,000

Accounts payable -----------------Br. 180,000

Receivables -------------------180,000

Notes payable (10% interest) ----------78,000

Inventories --------------------360,000
--------------------360,000

Accruals ----------------------------------90,000
----------------------------------90,000

Current assets ------------Br. 630,000

Current liabilities -----------------Br. 348,000

Net fixed assets ------------720,000

Common stock --------------------900,000

_________
Total assets ---------Br.
---------Br. 1,350,000

Retained earnings ---------------------102,000


---------------------102,000
Total liabilities and equity ---Br.
---Br. 1,350,000

Income statement for year ended December 31, 2002


Sales -------------------------------Br. 1,800,000
Operating costs -----------------------1,625,000
-----------------------1,625,000
EBIT ---------------------------------Br. 175,000
Interest ------------------------------------25,000
------------------------------------25,000
EBT--------------------------------- Br. 150,000
Taxes (40%) -----------------------------60,000
-----------------------------60,000
Net income --------------------------Br.
--------------------------Br. 90,000
The firms common stock price during 2002 was Br. 24. Similarly earnings per share
(EPS) and dividends per share (DPS) were Br. 1.80 and Br. 1.08 respectively. Sales are
projected to increase by 10% in 2003. It is learned that assets are operating at full
capacity.
Required:
a) Determine the AFN using the pro forma method.
b) Assume 50% of the AFN will be financed by common stock and the common stock
price remains unchanged in 2003, how many share should Addisalem issue in 2003?
c) How does the financing of AFN through common stock affects the firms dividend as
well as its retained earnings?

d) Assume also that the remaining 50% is to be financed by notes payable, how does this
affect interest expense?
e) Determine the AFN using the formula method
f) If fixed assets were operating at only 96% of capacity during 2002, how does this
affect AFN? (Use the formula method)

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