question

The most recent financial statements for Hornick, Inc., are shown here (assuming no income taxes): sales = 7600 costs = 5020 net income = 2580 assets = 19100 total = 19100 debt = 7000 equity = 12100 total = 19100 Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year's sales are projected to be $9,500. What is the external financing needed?

answer

An increase of sales to $9,500 is an increase of: Sales increase = ($9,500 - 7,600) / $7,600 Sales increase = .25, or 25% Assuming costs and assets increase proportionally, the pro forma financial statements will look like this: Pro forma income statement Pro forma balance sheet Sales $ 9,500.00 Assets $ 23,875.00 Debt $ 7,000.00 Costs 6,275.00 Equity 15,325.00 Net income $ 3,225.00 Total $ 23,875.00 Total $ 22,325.00 If no dividends are paid, the equity account will increase by the net income, so: Equity = $12,100 + 3,225.00 Equity = $15,325.00 So the EFN is: EFN = Total assets - Total liabilities and equity EFN = $23,875 - 22,325.00 EFN = $1,550.00

question

The most recent financial statements for Reply, Inc., are shown here: Income Statement Balance Sheet Sales $ 23,600 Assets $ 54,300 Debt $ 20,300 Costs 14,600 Equity 34,000 Taxable income $ 9,000 Total $ 54,300 Total $ 54,300 Taxes (40%) 3,600 Net income $ 5,400 Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,500 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $26,904. What is the external financing needed?

answer

An increase of sales to $26,904 is an increase of: Sales increase = ($26,904 - 23,600) / $23,600 Sales increase = .14, or 14% Assuming costs and assets increase proportionally, the pro forma financial statements will look like this: Pro forma income statement Pro forma balance sheet Sales $ 26,904 Assets $ 61,902 Debt $ 20,300 Costs 16,644 Equity 37,306 EBIT $ 10,260 Total $ 61,902 Total $ 57,606 Taxes (40%) 4,104 Net income $ 6,156 The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or: Dividends = ($2,500 / $5,400)($6,156) Dividends = $2,850 The addition to retained earnings is: Addition to retained earnings = $6,156 - 2,850 Addition to retained earnings = $3,306 And the new equity balance is: Equity = $34,000 + 3,306 Equity = $37,306 So the EFN is: EFN = Total assets - Total liabilities and equity EFN = $61,902 - 57,606 EFN = $4,296

question

The most recent financial statements for Cornwall, Inc., are shown here: Income Statement Balance Sheet Sales $ 6,700 Current assets $ 3,400 Current liabilities $ 2,200 Costs 5,300 Fixed assets 10,200 Long-term debt 3,750 Taxable income $ 1,400 Equity 7,650 Taxes (34%) 476 Total $ 13,600 Total $ 13,600 Net income $ 924 Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. As with every other firm in its industry, next year's sales are projected to increase by exactly 15 percent. What is the external financing needed?

answer

Assuming costs, assets, and current liabilities increase proportionally, the pro forma financial statements will look like this: Pro forma income statement Pro forma balance sheet Sales $ 7,705.00 CA $ 3,910.00 CL $ 2,530.00 Costs 6,095.00 FA 11,730.00 LTD 3,750.00 Taxable income $ 1,610.00 Equity 8,393.82 Taxes (34%) 547.40 TA $ 15,640.00 Total D;E $ 14,673.82 Net income $ 1,062.60 The payout ratio is 30 percent, so dividends will be: Dividends = .30($1,062.60) Dividends = $318.78 The addition to retained earnings is: Addition to retained earnings = $1,062.60 - 318.78 Addition to retained earnings = $743.82 So the EFN is: EFN = Total assets - Total liabilities and equity EFN = $15,640 - 14,673.82 EFN = $966.18

question

The most recent financial statements for Schenkel Co. are shown here: Income Statement Balance Sheet Sales $ 14,200 Current assets $ 11,100 Debt $ 15,600 Costs 8,500 Fixed assets 26,750 Equity 22,250 Taxable income $ 5,700 Total $ 37,850 Total $ 37,850 Taxes (40%) 2,280 Net income $ 3,420 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external financing is possible. What is the internal growth rate?

answer

To calculate the internal growth rate, we first need to calculate the ROA, which is: ROA = NI / TA ROA = $3,420 / $37,850 ROA = .0904, or 9.04% The plowback ratio, b, is one minus the payout ratio, so: b = 1 - .40 b = .60 Now we can use the internal growth rate equation to get: Internal growth rate = (ROA × b) / [1 - (ROA × b)] Internal growth rate = [.0904(.60)] / [1 - .0904(.60)] Internal growth rate = .0573, or 5.73%

question

The most recent financial statements for Schenkel Co. are shown here: Income Statement Balance Sheet Sales $ 18,000 Current assets $ 11,900 Debt $ 16,400 Costs 12,100 Fixed assets 28,750 Equity 24,250 Taxable income $ 5,900 Total $ 40,650 Total $ 40,650 Taxes (40%) 2,360 Net income $ 3,540 Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. No external equity financing is possible. What is the sustainable growth rate?

answer

To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = $3,540 / $24,250 ROE = .1460, or 14.60% The plowback ratio, b, is one minus the payout ratio, so: b = 1 - .40 b = .60 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 - (ROE × b)] Sustainable growth rate = [.1460(.60)] / [1 - .1460(.60)] Sustainable growth rate = .0960, or 9.60%

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question

The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $ 52,400 Current assets $ 22,600 Long-term debt $ 52,000 Costs 42,200 Fixed assets 92,000 Equity 62,600 Taxable income $ 10,200 Total $ 114,600 Total $ 114,600 Taxes (34%) 3,468 Net income $ 6,732 Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued?

answer

The maximum percentage sales increase is the sustainable growth rate. To calculate the sustainable growth rate, we first need to calculate the ROE, which is: ROE = NI / TE ROE = $6,732 / $62,600 ROE = .1075, or 10.75% The plowback ratio, b, is one minus the payout ratio, so: b = 1 - .30 b = .70 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 - (ROE × b)] Sustainable growth rate = [.1075(.70)] / [1 - .1075(.70)] Sustainable growth rate = .0814, or 8.14% So, the maximum dollar increase in sales is: Maximum increase in sales = $52,400(.0814) Maximum increase in sales = $4,265.68

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question

Consider the following income statement for the Heir Jordan Corporation: HEIR JORDAN CORPORATION Income Statement Sales $ 48,800 Costs 34,800 Taxable income $ 14,000 Taxes (30%) 4,200 Net income $ 9,800 Dividends $ 3,200 Addition to retained earnings 6,600 The projected sales growth rate is 18 percent. Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. (Input all amounts as positive values. Do not round intermediate calculations.) HEIR JORDAN CORPORATION Pro Forma Income Statement Sales $ 57,584 ± 0.1% Costs 41,064 ± 0.1% Taxable income $ 16,520 ± 0.1% Taxes 4,956 ± 0.1% Net income $ 11,564 ± 0.1% What is the projected addition to retained earnings? (Do not round intermediate calculations.) Addition to retained earnings $ 7,788 ± 0.1%

answer

Taxes (30%) = $4,956 The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or: Dividends = ($3,200 / $9,800)($11,564) Dividends = $3,776 And the addition to retained earnings will be: Addition to retained earnings = $11,564 - 3,776 Addition to retained earnings = $7,788

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question

Stone Sour Co. has an ROA of 11 percent and a payout ratio of 28 percent. What is its internal growth rate?

answer

We need to calculate the retention ratio to calculate the internal growth rate. The retention ratio is: b = 1 - .28 b = .72 Now we can use the internal growth rate equation to get: Internal growth rate = (ROA × b) / [1 - (ROA × b)] Internal growth rate = [.11(.72)] / [1 - .11(.72)] Internal growth rate = .0860, or 8.60%

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question

You are given the following information on Kaleb's Welding Supply: Profit margin 5.8 % Capital intensity ratio .67 Debt-equity ratio .7 Net income $ 64,000 Dividends $ 14,600 Calculate the sustainable growth rate.

answer

We first must calculate the ROE to calculate the sustainable growth rate. To do this we must realize two other relationships. The total asset turnover is the inverse of the capital intensity ratio, and the equity multiplier is 1 + D/E. Using these relationships, we get: ROE = (PM)(TAT)(EM) ROE = (.058)(1 / .67)(1 + .70) ROE = .1472, or 14.72% The plowback ratio is one minus the dividend payout ratio, so: b = 1 - ($14,600 / $64,000) b = .7719 Now we can use the sustainable growth rate equation to get: Sustainable growth rate = (ROE × b) / [1 - (ROE × b)] Sustainable growth rate = [.1472(.7719)] / [1 - .1472(.7719)] Sustainable growth rate = .1281, or 12.81%

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FIN 323 Chapter 4 Homework Practice for Exam – Flashcards

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