Total assets in 2005 were $1.2 million
Accounts payable in 2005 were $375,000
Common stock in 2005 was $425,000
Retained earnings in 2005 were $295,000
Total liabilities must equal total assets
So total liabilities in 2005 = $1.2 million
We are given:
Accounts payable = $375,000
Common stock = $425,000
Retained earnings = $295,000
Total liabilities - (Accounts payable + Common stock + Retained earnings)
= Long-term debt
So Long-term debt in 2005 = $1,200,000 - ($375,000 + $425,000 +
Total assets in 2005 were $1.2 million
Accounts payable in 2005 were $375,000
Common stock in 2005 was $425,000
Retained earnings in 2005 were $295,000
Total liabilities must equal total assets
So total liabilities in 2005 = $1.2 million
We are given:
Accounts payable = $375,000
Common stock = $425,000
Retained earnings = $295,000
Total liabilities - (Accounts payable + Common stock + Retained earnings)
= Long-term debt
So Long-term debt in 2005 = $1,200,000 - ($375,000 + $425,000 +
Total assets in 2005 were $1.2 million
Accounts payable in 2005 were $375,000
Common stock in 2005 was $425,000
Retained earnings in 2005 were $295,000
Total liabilities must equal total assets
So total liabilities in 2005 = $1.2 million
We are given:
Accounts payable = $375,000
Common stock = $425,000
Retained earnings = $295,000
Total liabilities - (Accounts payable + Common stock + Retained earnings)
= Long-term debt
So Long-term debt in 2005 = $1,200,000 - ($375,000 + $425,000 +
Total assets in 2005 were $1.2 million
Accounts payable in 2005 were $375,000
Common stock in 2005 was $425,000
Retained earnings in 2005 were $295,000
Total liabilities must equal total assets
So total liabilities in 2005 = $1.2 million
We are given:
Accounts payable = $375,000
Common stock = $425,000
Retained earnings = $295,000
Total liabilities - (Accounts payable + Common stock + Retained earnings)
= Long-term debt
So Long-term debt in 2005 = $1,200,000 - ($375,000 + $425,000 +
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FINANCIAL PLANNING
AND FORECASTING PRACTICE QUESTIONS BY DR. SHAKEEL IQBAL QUESTION # 1 2
AFN equation Carter Corporation’s sales are expected to increase
from $5 million in 2005 to $6 million in 2006, or by 20 percent. Its assets totaled $3 million at the end of 2005. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2005, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 5 percent, and the forecasted retention ratio is 30 percent. Use the AFN equation to forecast Carter’s additional funds needed for the coming year. SOLUTION: 3
the additional funds needed be if the company’s year-end 2005 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 1? Is the company’s “capital intensity” the same or different? Explain. SOLUTION: 5
The capital intensity ratio is measured as A*/S0. This firm’s capital
intensity ratio is higher than that of the firm in Problem 17-1; therefore, this firm is more capital intensive—it would require a large increase in total assets to support the increase in sales. QUESTION # 3 6
AFN equation Refer to Problem 1 and assume that
the company had $3 million in assets at the end of 2005. However, now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 1? SOLUTION: 7
QUESTION # 3 AFN = (0.6)($1,000,000) – (0.1)($1,000,000) – 0.05($6,000,000)(1) = $600,000 – $100,000 – $300,000 = $200,000. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed. QUESTION # 4 8
1. Pro forma income statement Austin Grocers recently reported the following 2005 income statement (in millions of dollars):
Sales $700 Operating costs including depreciation 500 EBIT $200 Interest 40 EBT $160 Taxes (40%) 64 Net income $ 96 Dividends $ 32 Addition to retained earnings $ 64
This year the company is forecasting a 25 percent increase in sales, and it expects that its year-end operating costs including depreciation will equal 70 percent of sales. Austin’s tax rate, interest expense, and dividend payout ratio are all expected to remain constant.
a) What is Austin’s projected 2006 net income?
b) What is the expected growth rate in Austin’s dividends? SOLUTION: 9
b. Dividends = ($44.50 – $32.00)/$32.00 = 39.06%.
QUESTION # 5 10
Excess capacity Walter Industries has $5 billion in sales and $1.7
billion in fixed assets. Currently, the company’s fixed assets are operating at 90 percent of capacity. a) What level of sales could Walter Industries have obtained if it had been operating at full capacity? b) What is Walter’s target fixed assets/sales ratio? c) If Walter’s sales increase 12 percent, how large of an increase in fixed assets would the company need in order to meet its target fixed assets/sales ratio? SOLUTION: 11
QUESTION # 5 Sales = $5,000,000,000; FA = $1,700,000,000; FA are operated at 90% capacity.
a. Full capacity sales = $5,000,000,000/0.90 = $5,555,555,556. b. Target FA/S ratio = $1,700,000,000/$5,555,555,556 = 30.6%. c. Sales increase 12%; FA = ?
S1 = $5,000,000,000 1.12 = $5,600,000,000. No increase in FA up to $5,555,555,556. FA = 0.306 ($5,600,000,000 – $5,555,555,556) = 0.306 ($44,444,444) = $13,600,000. QUESTION # 6 12 Pro forma income statement At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars): Sales $3,000 Operating costs excluding depreciation 2,450 EBITDA $ 550 Depreciation 250 EBIT $ 300 Interest 125 EBT $ 175 Taxes (40%) 70 Net income $ 105
Looking ahead to the following year, the company’s CFO has assembled the following information:
Year-end sales are expected to be 10 percent higher than the $3 billion in sales generated last year. Year-end operating costs, excluding depreciation, are expected to equal 80 percent of year-end sales. Depreciation is expected to increase at the same rate as sales. Interest costs are expected to remain unchanged. The tax rate is expected to remain at 40 percent.
On the basis of this information, what will be the forecast for Roberts’ year-end net income? SOLUTION: 13
QUESTION # 6 Actual Forecast Basis Pro Forma Sales $3,000 1.10 $3,300 Oper. costs excluding depreciation 2,450 0.80 Sales 2,640 EBITDA $ 550 $ 660 Depreciation 250 1.10 275 EBIT $ 300 $ 385 Interest 125 125 EBT $ 175 $ 260 Taxes (40%) 70 104 Net income $ 105 $ 156 QUESTION # 7 14 Long-term financing needed At year-end 2005, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2005 were $2.5 million, are expected to increase by 25 percent in 2006. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Ambrose typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2005, and retained earnings were $295,000. Ambrose plans to sell new common stock in the amount of $75,000. The firm’s profit margin on sales is 6 percent; 60 percent of earnings will be retained. a) What was Ambrose’s total debt in 2005? b) How much new, long-term debt financing will be needed in 2006? (Hint: AFN _ New stock _ New long-term debt.) SOLUTION: 15
QUESTION # 7 Part (a)
Total liabilitie s = Accounts payable + Long-term debt + Common stock + Retained earnings and equity $1,200,000 = $375,000 + Long-term debt + $425,000 + $295,000 Long-term debt = $105,000.
Total debt = Accounts payable + Long-term debt
= $375,000 + $105,000 = $480,000.
Alternatively, Total debt = Total liabilities and equity – Common stock – Retained earnings = $1,200,000 – $425,000 – $295,000 = $480,000. SOLUTION: 16
Sales increase Pierce Furnishings generated $2.0 million in sales
during 2005, and its year-end total assets were $1.5 million. Also, at year-end 2005, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2006, the company estimates p that its assets must increase by 75 cents for every $1 increase in sales. Pierce’s profit margin is 5 percent, and its retention ratio is 40 percent. How large a sales increase can the company achieve without having to raise funds externally? SOLUTION: 18
