Corporate Finance Ppt. Slide

Presentation on Corporate Finance
Presented by
Md. Jahangir Alam
Program: MBA
Batch: MBA-1
Roll: 20315007
Q. After examining patterns from recent
years, management found the following
regression-estimated
relationships between some company
balance sheets and income statement
accounts and sales.
CA = 0.5 million +0.25S
FA = 1.0 million+ 0.50S
CL= 0.1 million + 0.10S
NP= 0.0 million + 0.02S
where
CA = Current assets
FA = Fixed assets
CL = Current liabilities
NP = Net profit after taxes
S = Sales
Management further found that the
companys sales bear a relationship to GNP.
That
relationship is:
S = 0.00001 x GNP
The forecast of GNP for next year is $2.05
trillion. The firm pays out 34 percent of net
profits after taxes in dividends.
Create a pro forma balance sheet for this
firm.
Solution. From the relationship, S = .00001
x GNP, we can get forecast sales:
S = 0.00001; GNP = 0.00001 ($2.05
trillion) = $2,05,00,000
Now, compute the other values:
Projected Current Assets = Current Assets

+ Current Assets:
CA = $5,00,000 + 0.25 ($2,05,00,000)
=$56,25,000
Similar for rest:
FA = $10,00,000 + 0.50 ($2,05,00,000)
= $1,12,50,000
CL = $1,00,000 + 0.10
($2,05,00,000) = $21,50,000
and:
NP = 0.02 ($2,05,00,000) = $4,10,000
Compute the new amount of retained earnings:
RE = NP ( 1 - dvd payout ratio)
= NP (1 - 0.34) = $4,10,000 (0.66) =
$2,70,600
RE = $34,00,000 + $2,70,600 =
$36,70,600
Compute the new amount of bonds:
Debt-to-Asset Ratio = Total Debt / Total
Assets
= ($11,00,000 + $25,00,000) /
($30,00,000 + $60,00,000) = 0.40
Bonds = [ Total Assets x Debt/Asset ratio
] - Current Liabilities
= [(CA + FA) x 0.40] - CL
= ($56,25,000 + $1,12,50,000) (0.40) -
$21,50,000 = $46,00,000
Compute the new amount of stock:
Use: Total Assets = Total Liabilities + Total
Equity, then
Stock = [(CA + FA) - (CL + Bonds + RE)]
= ($56,25,000 + $1,12,50,000) -
($21,50,000 + 46,00,000 + 36,70,600)
= $64,54,400
Q.The Stieben Company has determined that
the following will be true next year:
T = Ratio of total assets to sales = 1
P = Net profit margin on sales = 5%
d = Dividend-payout ratio = 50%
L = Debtequity ratio = 1
a. What is Stiebens sustainable growth rate in
sales?
b. Can Stiebens actual growth rate in sales be
different from its sustainable growth rate?
Why or why not?
c. How can Stieben change its sustainable
growth?
a. Compute the sustainable growth using
the formula from the text
b. Yes, it is possible for the actual growth
to differ from the sustainable growth. If
any of the actual parameters (P, T, L or d)
differ from those used to compute the
sustainable growth rate, the actual growth
rate will deviate from the sustainable
growth rate.
c. Stieben Company can increase its growth
rate by doing any of the following.
i. Sell new stock
ii. Increase its debt-to-equity ratio by
either selling more debt or repurchasing
stock
iii. Increase its net profit margin
iv. Decrease its total assets to sales ratio
v. Reduce its dividend payout
Q.Your firm recently hired a new MBA.
She insists that your firm is incorrectly
computing
its sustainable growth rate. Your firm
computes the sustainable growth rate
using the
following formula:
P = Net profit margin on sales
d = Dividend-payout ratio
L = Debtequity ratio
T= Ratio of total assets to sales
Your new employee claims that the correct
formula is ROE x (1 - d) where ROE is net
profit divided by net worth and d is
dividends divided by net profit. Is your new
employee correct?
Answer. Yes new employee is correct.
Q. The MBI Company does not want to
grow. The companys financial management
believes it has no positive NPV projects. The
companys operating financial
characteristics
are:
Profit margin = 10%
Assetssales ratio = 150%
Debtequity ratio = 100%
Dividend-payout ratio = 50%
a. Calculate the sustainable growth rate for
the MBI Company.
b. How can the MBI Company achieve its
stated growth goal?
Solution:
a. Sustainable growth rate:
.10x(1-.50)x(1+1)
1.5-.10x(1-.50)x(1+1)
=.0714
=7.14%
b. By increasing profit margin desired
growth can be achived.
Q. Atlantic Transportation Co. has a payout
ratio of 60 percent, debtequity ratio of
50 percent, return on equity of 16 percent,
and an assetssales ratio of 175 percent.
a. What is its sustainable growth rate?
b. What must its profit margin be in order
to achieve its sustainable growth rate?
Solution:
a. Sustainable growth rate:
.187x(1-.6)x(1+.5) .
1.75-.187x(1-.6)x(1+.5)
=.068
=6.8%
b. ROE=Net Profit/Equity=16%
D/E=0.5 >D=Ex.5
TA/TS=175%=1.75
=>TS= TA/1.75
=>E+(Ex.5)/1.75=1.5E/1.75
NPM=Net Profit/Sales
=Net Profit/(1.5E/1.75)
=Net Profit/Ex1.5x1.17
=16%x1.17
=18.7%
THANK YOU

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Presentation on Corporate Finance

Projected Current Assets = Current Assets

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