Chapter 3

Problems 1-30

Input boxes in tan

Output boxes in yellow
Given data in blue
Calculations in red
Answers in green

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To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak"
and "Solver Add-In."
sis ToolPak"
Chapter 3
Question 1

Input area:

Equity multiplier 1.35

Total asset turnover 1.87
Profit margin 6.10%

Output area:

Return on equity 15.40%

Chapter 3
Question 2

Input area:

Debt/equity ratio 0.85

Return on assets 7.3%
Total equity $ 910,000

Output area:

Equity multiplier 1.85

Return on equity 13.51%

Net income $ 122,895.50

Chapter 3
Question 3

Input area:

Sales $ 3,300
Total assets 1,520
Debt-equity ratio 1.35
Return on equity 14%

Output area:

Profit margin 0.0274

Net income $ 90.55

Chapter 3
Question 4

Input area:

Sales $ 37,600 Assets $ 135,000 Debt

Costs 26,100 Equity
Taxable income $ 11,500 Total $ 135,000 Total
Taxes (21%) 2,415
Net income $ 9,085

Tax rate 21%

Dividend paid $ 2,700
Next year's sales $ 42,112

Output area:

Percent increase in sales = 12.00%

Pro forma income statement Pro forma balance sheet

Sales $ 42,112.00 Assets $ 151,200.00 Debt
Costs 29,232.00 Equity
Taxable income $ 12,880.00 Total $ 151,200.00 Total
Taxes (21%) 2,704.80
Net income $ 10,175.20

Dividends $ 3,024.00
Add. To RE $ 7,151.20

External financing $ 9,048.80

 $ 37,000
98,000
$ 135,000

balance sheet
$ 37,000.00
105,151.20
$ 142,151.20
Chapter 3
Question 5

Input area:

Sales $ 49,000 Current assets $ 27,000

Costs 23,600 Fixed assets 120,000
Taxable income $ 25,400 Total $ 147,000
Taxes (21%) 5,334
Net income $ 20,066

Tax rate 21%

Payout ratio 30%

Output area:

Return on equity 22.80%

Plowback ratio 0.70
Sustainable growth rate 18.99%

Maximum increase in sales $ 9,306.67

Long-term debt $ 59,000
Equity 88,000
Total $ 147,000
Chapter 3
Question 6

Input area:

Return on equity 11%

Payout ratio 20%

Output area:

Plowback ratio 80%

Sustainable growth rate 9.65%

Chapter 3
Question 7

Input area:

Total asset turnover 2.65

Profit margin 5.7%
Equity multiplier 1.60
Payout ratio 70%

Output area:

Return on equity 24.17%

Plowback ratio 30.00%

Sustainable growth rate 7.82%

Chapter 3
Question 8

Input area:

Sales $ 8,300 Assets $ 19,100 Debt

Costs 6,490 Equity
Net income $ 1,810 Total $ 19,100 Total

Next year's sales $ 9,462

Output area:

Percent increase in sales 14.00%

Pro forma income statement Pro forma balance sheet

Sales $ 9,462 Assets $ 21,774 Debt
Costs 7,399 Equity
Net income $ 2,063 Total $ 21,774 Total

External financing $ 611

$ 8,400
10,700
$ 19,100

$ 8,400
12,763
$ 21,163
 Chapter 3
Question 9

Input area:

Sales growth 12%

New sales amount $ 320,000,000
Current assets/Sales 20%
Fixed assets/Sales 70%
Short-term debt/Sales 15%
Payout ratio 30%
Long-term debt $ 110,000,000
Stock value $ 45,000,000
Profit margin 9%

Output area:

a. Current sales $ 285,714,286

Change in sales $ 34,285,714

Assets Liabilities and equity

Current assets $ 57,142,857 Short-term debt
Long-term debt

Fixed assets 200,000,000 Common stock

Accumulated retained earnings
Total equity

Total assets $ 257,142,857 Total liabilities and equity

b. EFN $ 5,554,286

c. Net income $ 28,800,000

Additions to RE $ 20,160,000

Assets Liabilities and equity

Current assets $ 64,000,000 Short-term debt
Long-term debt
Fixed assets $ 224,000,000 Common stock
Accumulated retained earnings
Total equity

Total assets $ 288,000,000 Total liabilities and equity

EFN $ 5,554,286
$ 42,857,143
$ 110,000,000

$ 45,000,000
59,285,714
$ 104,285,714

$ 257,142,857

$ 48,000,000
$ 110,000,000
$ 45,000,000
79,445,714
$ 124,445,714

$ 282,445,714
Chapter 3
Question 10

Input area:

ROE 12.10%
Payout ratio 25%

Output area:

Retention ratio 75%

Sustainable growth rate 9.98%

Chapter 3
Question 11

Input area:

Firm A
D/TA 35.00%
ROA 8.00%
Firm B
D/TA 45.00%
ROA 7.00%

Output area:

Firm A ROE 12.31%

Firm B ROE 12.73%

Chapter 3
Question 12

Input area:

Net income -£ 18,137

Sales £ 279,386

Sales $ 359,815

Output area:

Profit margin -6.49%

As long as both net income and sales are measured

in the same currency, there is not a problem; in fact,
except for some market value ratios like EPS and
BVPS, none of the financial ratios discussed in the
text are measured in terms of currency. This is one
reason why financial ratio analysis is widely used in
international finance to compare business operations
of firms and/or divisions across national economic
borders.

Net income -$23,358.24

 Chapter 3
Question 13

Input area:

Growth rate 15%

Sales $ 21,860,000
Costs 19,450,000
Taxable income $ 2,410,000
Taxes 602,500
Net income $ 1,807,500

Dividends $ 361,500
Addition to retained earnings 1,446,000

Current assets $ 6,900,000 Short-term debt $ 5,100,000

Fixed assets 17,300,000 Long-term debt 5,800,000

Common stock $ 3,100,000

Accumulated retained earnings 10,200,000
Total equity $ 13,300,000
Total assets $ 24,200,000 Total L&E $ 24,200,000

Output area:

a. Assets/Sales 1.11
Change in sales $ 3,279,000
Short-term debt/Sales 23.33%
Profit margin 8.27%
New sales $ 25,139,000
Payout ratio 20.00%

EFN $ 1,202,100

b. Assets Liabilities and equity

Current assets $ 7,935,000 Short-term debt $ 5,865,000
Long-term debt $ 5,800,000

Fixed assets 19,895,000 Common stock $ 3,100,000

Accumulated retained earnings 11,862,900
Total equity $ 14,962,900

Total assets $ 27,830,000 Total liabilities and equity $ 26,627,900

Net income $ 2,078,625

Additions to retained earnings $ 1,662,900

EFN $ 1,202,100

c. Debt/Equity ratio 81.95%

Total assets/Sales 110.70%

Sustainable growth rate 12.20%

Alternatively:
ROE 13.59%
Retention ratio 80.00%
 Sustainable growth 12.20%

d. Zero dividend EFN

Projected net income $ 2,078,625

Assets Liabilities and equity

Current assets $ 7,935,000 Short-term debt $ 5,865,000
Long-term debt $ 5,800,000

Fixed assets 19,895,000 Common stock $ 3,100,000

Accumulated retained earnings 12,278,625
Total equity $ 15,378,625

Total assets $ 27,830,000 Total liabilities and equity $ 27,043,625

EFN $ 786,375
Chapter 3
Question 14

Input area:

Net income $ 386,000

Profit margin 8.60%
Accounts receivable $ 191,300
Percent credit sales 80%

Output area:

Total sales $ 4,488,372

Credit sales $ 3,590,698
Receivables turnover 18.77

Days' sales in receivables 19.45

Chapter 3
Question 15

Input area:

Long-term debt ratio 0.34

Current ratio 1.29
Current liabilities $ 1,450
Sales $ 7,380
Profit margin 8.1%
Return on equity 14.3%

Output area:

Current assets $ 1,870.50

Net income $ 597.78
Total equity $ 4,180.28
Long-term debt $ 2,153.48
Total debt $ 3,603.48
Total assets $ 7,783.76

Net fixed assets $ 5,913.26

Chapter 3
Question 16

Input area:

Net income $ 13,150

Tax rate 24%
Total interest expense $ 3,460
Depreciation expense $ 4,380

Output area:

Earnings before taxes $ 17,302.63

EBIT $ 20,762.63

EBITDA $ 25,142.63

Cash coverage ratio 7.27

Chapter 3
Question 18

Input area:

2018 2019
Current assets Current liabilities
Cash $ 11,459 $ 14,453 Accounts payable
Accounts receivable 29,247 33,304 Notes payable
Inventory 52,655 60,689 Total
Total $ 93,361 $ 108,446
Long-term debt

Owners' equity
Common stock and
paid-in surplus
Net plant and equipment $ 301,978 $ 353,330 Retained earnings
Total

Total assets $ 395,339 $ 461,776 Total L&E

Output area:

Common Common Common

2018 size 2019 size base year
Assets
Current assets
Cash $ 11,459 2.90% $ 14,453 3.13% 1.2613
Accounts receivable 29,247 7.40% 33,304 7.21% 1.1387
Inventory 52,655 13.32% 60,689 13.14% 1.1526
Total $ 93,361 23.62% $ 108,446 23.48% 1.1616
Fixed assets
Net plant and equipment 301,978 76.38% 353,330 76.52% 1.1701
Total assets $ 395,339 100% $ 461,776 100% 1.1681

Liabilities and owners' equity

Current liabilities
Accounts payable $ 58,483 14.79% $ 66,623 14.43% 1.1392
Notes payable 24,973 6.32% 24,735 5.36% 0.9905
Total $ 83,456 21.11% $ 91,358 19.78% 1.0947
Long-term debt 34,500 8.73% 44,700 9.68% 1.2957
Owners' equity
Common stock and paid-in surplus $ 54,000 13.66% $ 56,500 12.24% 1.0463
Accumulated retained earnings 223,383 56.50% 269,218 58.30% 1.2052
Total $ 277,383 70.16% $ 325,718 70.54% 1.1743
Total liabilities and owners' equity $ 395,339 100% $ 461,776 100% 1.1681
 2018 2019

$ 58,483 $ 66,623
24,973 24,735
$ 83,456 $ 91,358

$ 34,500 $ 44,700

$ 54,000 $ 56,500
223,383 269,218
$ 277,383 $ 325,718

$ 395,339 $ 461,776
 Chapter 3
Question 19,20

Input area:

Percent of capacity 90%

Current sales $ 530,000
### Fixed assets $ 620,000
### Projected sales $ 605,000

Output area:

Full capacity sales $ 588,889

Sales growth $ 58,889

Fixed assets / Full capacity sales 1.0528

Total fixed assets $ 636,962

New fixed assets $ 16,962.26

Chapter 3
Questions 21-25

Input area:

For problems 23, 24, and 25, change the percent sales growth rate in the input area below.

Sales $ 891,600 Assets Liabilities and owners' equity

Costs 727,900 Current assets Current liabilities
Other expenses 18,240 Cash $ 24,280 Accounts payable
EBIT $ 145,460 Accounts receivable 37,070 Notes payable
Interest expense 13,400 Inventory 83,400 Total
Taxable income $ 132,060 Total $ 144,750 Long-term debt
Taxes 29,053 Fixed assets
Net income $ 103,007 Net plant and Owners' equity
equipment $ 396,500 Common stock and
Dividends $ 36,224 paid-in surplus
Add. to retained earnings 66,783 Retained earnings
Total
Sales increase 20.00% Total liabilities and
Operating capacity 100% Total assets $ 541,250 owners' equity
Tax rate 22%

Output area:

Dividend payout ratio 0.35

2016 Pro Forma Income Statement Assets Liabilities and owners' equity
Sales $ 1,069,920 Current assets Current liabilities
Costs 873,480 Cash $ 29,136 Accounts payable
Other expenses 21,888 Accounts receivable 44,484 Notes payable
EBIT $ 174,552 Inventory 100,080 Total
Interest expense 13,400 Total $ 173,700 Long-term debt
Taxable income $ 161,152 Fixed assets
Taxes 35,453 Net plant and Owners' equity
Net income $ 125,699 equipment 475,800 Common stock and
paid-in surplus
Dividends $ 44,204 Retained earnings
Add. to RE 81,495 Total
Total liabilities and
Total assets $ 649,500 owners' equity

External financing $ 13,715

#22 and #24

Full capacity sales $ 891,600
Fixed assets required at full capacity 0.44471
Total fixed assets $ 475,800

External financing needed $ 13,715

#23 and #25

2019 Debt/Equity ratio 0.77616
Debt/Asset ratio 0.43699
Equity/Asset ratio 0.56301
New total debt $ 299,773
New LTD $ 50,213
Excess debt raised $ 36,498

EFN $ 50,213
Assets Liabilities and owners' equity
Current assets Current liabilities
Cash $ 29,136 Accounts payable
Accounts receivable 44,484 Notes payable
 Inventory 100,080 Total
Total $ 173,700 Long-term debt
Fixed assets
Net plant and Owners' equity
equipment $ 475,800 Common stock and
paid-in surplus
Retained earnings
Total
Total liabilities and
Total assets $ 649,500 owners' equity

Assets Liabilities and owners' equity

Current assets Current liabilities
Cash $ 29,136 Accounts payable
Excess cash 36,498 Notes payable
Accounts receivable 44,484 Total
Inventory 100,080 Long-term debt
Total $ 210,198
Fixed assets Owners' equity
Net plant and Common stock and
equipment 475,800 paid-in surplus
Retained earnings
Total
Total liabilities and
Total assets $ 685,998 owners' equity

Total debt at current D/A $ 283,824.00

Total equity at current D/A $ 365,676.00

Debt repurchase $ 15,949

Equity repurchase $ 20,549
Assets Liabilities and owners' equity
Current assets Current liabilities
Cash $ 29,136 Accounts payable
Accounts receivable 44,484 Notes payable
Inventory 100,080 Total
Total $ 173,700 Long-term debt
Fixed assets
Net plant and Owners' equity
equipment 475,800 Common stock and
paid-in surplus
Retained earnings
Total
Total liabilities and
Total assets $ 649,500 owners' equity
lities and owners' equity

$ 65,200
16,320
$ 81,520
$ 155,000

$ 130,000
174,730
$ 304,730

$ 541,250

lities and owners' equity

$ 78,240
16,320
$ 94,560
155,000

$ 130,000
256,225
$ 386,225

$ 635,785

lities and owners' equity

$ 78,240
16,320
 $ 94,560
$ 205,213

$ 130,000
256,225
$ 386,225

$ 685,998

lities and owners' equity

$ 78,240
16,320
$ 94,560
205,213

$ 130,000
256,225
$ 386,225

$ 685,998

lities and owners' equity

$ 78,240
16,320
$ 94,560
189,264

$ 130,000
235,676
$ 365,676

$ 649,500
Chapter 3
Question 26

Input area:

Growth rate 11%

Debt/Equity ratio 0.37
Profit margin 4.20%
Total assets to sales 0.80

Output area:

Return on equity 7.19%

b 1.38
Payout ratio (0.38)

This is a negative dividend payout ratio of 38%

the growth rate is inconsistent with the other constraints. The lowest possible
payout ratio is 0, which corresponds to b = 1, or total earnings retention.

Maximum sustainable g 7.75%

 which is impossible;
nts. The lowest possible
earnings retention.
Chapter 3
Question 27

Output area:

External financing needed = Increase in assets - Addition to retained earnings

Increase in assets = A X g
Addition to retained earnings = (Net income X b) (1 + g)
Net income = PM(S)

Thus, EFN = A(g) - PM(S)b(1 + g)

= A(g) - PM(S)b - [PM(S)b]g
= -PM(S)b + [A-PM(S)b]g

Internal growth rate:

EFN = 0 = -PM(S)b + [A - PM(S)b]g

g = [PM(S)b]/[A - PM(S)b]
Since ROA = NI/A = PM(S)/A, dividing numerator and denominator by A gives
g = [(PM(S)b)/A]/[(A - PM(S)b)/A]
= b(ROA)/[1 - b(ROA)]
retained earnings

minator by A gives
Chapter 3
Question 30

Input area:

Beginning TA $ 430,000
Beginning equity $ 260,000
Ending TA $ 470,000
Net income $ 80,000
Dividends $ 44,000

Output area:

Retained earnings $ 36,000

Ending equity $ 296,000
Plowback ratio 45.00%

ROE (beg. equity) 30.77%

ROE (ending equity) 27.03%

Exact SGR 13.85%

ROE x b (using beg. 13.85%

Equity for ROE)

ROE x b (using end 12.16%

Equity for ROE)