Module 5 Homework Problems 1) Consider the simplified financial statement for the Fire Corporation. The company has a predicted sales increase of 15%, and pays out pays out half of its net income in the form of cash dividends. Costs and assets vary with sales, but debt and equity do not. Prepare a proforma income statement and balance sheet, and determine the external financing needed. FIRE CORPORATION FIRE CORPORATION Balance Sheet Income Statement Assets $ 25,300 Sales $ 32,000 TOTAL ASSETS $ 25,300 Costs $ 24.400 Net Income $ 7,600 Debt $ 5,800 Dividends $ 3,800 Equity $ 19,500 Retained Earnings $ 3,800 Retained Earnings $ . TOTAL LIAB & EQUITY $ 25,300 2) Consider the following financial statement for Heir Jordan Corporation. A 20% growth rate in sales is projected. Prepare a pro forma income statement and balance sheet assuming that costs, assets and accounts payable vary with sales, but notes payable o not. Further assume that the dividend payout ratio remains constant. HEIR JORDAN CORPORATION Income Statement Sales 47,000 Costs 31,300 Taxable income 15,700 Taxes (35%) 5.495 Net Income 10.205 Dividends 2.500 RE 7,705 Current Assets Cash A/R Inventory Total HEIR JORDAN CORPORATION Balance sheet Current Liabilities 2,950 AP 4,100 N/P 6,400 Total 13,450 Long Term Debt Owners' Equity Common 41.300 R/E Total 2,400 5,400 7,800 28,000 Fixed Assets Net P & E 15,000 3,950 18,950 TOTAL ASSETS 54,750 Total Liab & Equity 54,750 a. Calculate the External Funds Needed. b. Calculate the Internal Growth Rate C. Calculate the Sustainable Growth Rate 3) Part A: Alter Bridge Mfg.Inc. is currently operating at only 92% of fixed asset capacity. Current Sales are $640,000. How fast can sales grow before any new fixed assets are needed? NOTE: Remember that to calculate a percentage change you take the new value and subtract it from the old value, then divided the whole thing by the old value. In this case, it would be: (full capacity sales-current sales)/current sales Part B: Suppose that fixed assets for Alter Bridge Mfg. Inc. are $490,000 and sales are projected to grow to $730,000. How much in new fixed assets are required to support this growth in sales? Assume the company maintains its current operating capacity. 4) The most recent financial statements for Fleury, Inc. follow. Sales for 2012 are projected to grow by 20%. The interest expense will remain constant, as will the tax rate and the dividend payout rate. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. Part A: If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 20% growth in sales? Part B: In the previous problem, suppose that the firm was operating at only 80% capacity in 2011. What is the EFN now? FLEURY, INC 2011 Income Statement Sales $ Costs S Other Expenses $ EBIT $ Interest Paid $ Taxable income $ Taxes $ Net Income Dividends Addition to Retained Earnings $ 743,000 578,000 15,200 149,800 11,200 138,600 48,510 90,090 27,027 63,036 $ Current Assets Cash A/R Inventory Total $ FLEURY, INC 2011 Balance Sheet Current Liabilities $ 20,240 AP 32,560 N/P $ 69,520 Total $ 122,320 Long Term Debt Total Debt Owners' Equity $ 330,400 Common RE Total Equity $ $ $ $ $ 54,400 13,600 68,000 126,000 194,000 Fixed Assets Net Plant & Equipment $ 112,000 $ 146,720 $ 258, 720 Total Assets $ 452,720 Total Liab & Equity $452,720 5) Based on the income statement and balance sheet below for S & S Air, prepare financial statements for the next year so that the company can begin to address any outside investment requirements. a. Calculate the internal growth rate and sustainable growth rate for S & S Air. Use 2011 Data. b. S & S Air is planning for a growth rate of 12% next year. Calculate the EFN for the company, assuming the company is operating at full capacity. Further assume that costs and other expenses vary with sales, as do the current assets, fixed assets, and accounts payable. All else remains constant. Can the company's sales increase at this growth rate? C. Most assets can be increased as a percentage of sales. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a lumpy fixed cost structure. Assume S & S Air is currently producing at 100% capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this new assumption. S & S AIR 2011 Income Statement Sales $ 36,599,300 Costs $ 26,669,496 Other Expenses $ 4,641,000 Depreciation 1.640,200 EBIT S 3,648,604 Interest Paid 573,200 Taxable income $ 3,075,404 Taxes 1.230,162 Net Income 1,845,242 Dividends 560,000 Addition to Retained Earnings $ 1.285.242 en een S . S&S AIR 2011 Balance Sheet Current Assets Current Liabilities Cash $ 396,900 A/P A/R $ 637,560 N/P Inventory $ 933,400 Total Total $ 1.967,860 Long Term Debt Total Debt Fixed Assets Owners' Equity Net Plant & Equipment $ 15,411,620 Common RE Total Equity S 844,550 $ 1,928,500 $ 2,773,050 $ 5,050,000 $ 7,823,050 $ 322,500 $ 9.233.930 $ 9,556,430 $ 15,411,620 Total Liab & Equity $17,379,480 Module 5 Homework Problems 1) Consider the simplified financial statement for the Fire Corporation. The company has a predicted sales increase of 15%, and pays out pays out half of its net income in the form of cash dividends. Costs and assets vary with sales, but debt and equity do not. Prepare a proforma income statement and balance sheet, and determine the external financing needed. FIRE CORPORATION FIRE CORPORATION Balance Sheet Income Statement Assets $ 25,300 Sales $ 32,000 TOTAL ASSETS $ 25,300 Costs $ 24.400 Net Income $ 7,600 Debt $ 5,800 Dividends $ 3,800 Equity $ 19,500 Retained Earnings $ 3,800 Retained Earnings $ . TOTAL LIAB & EQUITY $ 25,300 2) Consider the following financial statement for Heir Jordan Corporation. A 20% growth rate in sales is projected. Prepare a pro forma income statement and balance sheet assuming that costs, assets and accounts payable vary with sales, but notes payable o not. Further assume that the dividend payout ratio remains constant. HEIR JORDAN CORPORATION Income Statement Sales 47,000 Costs 31,300 Taxable income 15,700 Taxes (35%) 5.495 Net Income 10.205 Dividends 2.500 RE 7,705 Current Assets Cash A/R Inventory Total HEIR JORDAN CORPORATION Balance sheet Current Liabilities 2,950 AP 4,100 N/P 6,400 Total 13,450 Long Term Debt Owners' Equity Common 41.300 R/E Total 2,400 5,400 7,800 28,000 Fixed Assets Net P & E 15,000 3,950 18,950 TOTAL ASSETS 54,750 Total Liab & Equity 54,750 a. Calculate the External Funds Needed. b. Calculate the Internal Growth Rate C. Calculate the Sustainable Growth Rate 3) Part A: Alter Bridge Mfg.Inc. is currently operating at only 92% of fixed asset capacity. Current Sales are $640,000. How fast can sales grow before any new fixed assets are needed? NOTE: Remember that to calculate a percentage change you take the new value and subtract it from the old value, then divided the whole thing by the old value. In this case, it would be: (full capacity sales-current sales)/current sales Part B: Suppose that fixed assets for Alter Bridge Mfg. Inc. are $490,000 and sales are projected to grow to $730,000. How much in new fixed assets are required to support this growth in sales? Assume the company maintains its current operating capacity. 4) The most recent financial statements for Fleury, Inc. follow. Sales for 2012 are projected to grow by 20%. The interest expense will remain constant, as will the tax rate and the dividend payout rate. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales. Part A: If the firm is operating at full capacity and no new debt or equity is issued, what external financing is needed to support the 20% growth in sales? Part B: In the previous problem, suppose that the firm was operating at only 80% capacity in 2011. What is the EFN now? FLEURY, INC 2011 Income Statement Sales $ Costs S Other Expenses $ EBIT $ Interest Paid $ Taxable income $ Taxes $ Net Income Dividends Addition to Retained Earnings $ 743,000 578,000 15,200 149,800 11,200 138,600 48,510 90,090 27,027 63,036 $ Current Assets Cash A/R Inventory Total $ FLEURY, INC 2011 Balance Sheet Current Liabilities $ 20,240 AP 32,560 N/P $ 69,520 Total $ 122,320 Long Term Debt Total Debt Owners' Equity $ 330,400 Common RE Total Equity $ $ $ $ $ 54,400 13,600 68,000 126,000 194,000 Fixed Assets Net Plant & Equipment $ 112,000 $ 146,720 $ 258, 720 Total Assets $ 452,720 Total Liab & Equity $452,720 5) Based on the income statement and balance sheet below for S & S Air, prepare financial statements for the next year so that the company can begin to address any outside investment requirements. a. Calculate the internal growth rate and sustainable growth rate for S & S Air. Use 2011 Data. b. S & S Air is planning for a growth rate of 12% next year. Calculate the EFN for the company, assuming the company is operating at full capacity. Further assume that costs and other expenses vary with sales, as do the current assets, fixed assets, and accounts payable. All else remains constant. Can the company's sales increase at this growth rate? C. Most assets can be increased as a percentage of sales. However, fixed assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a lumpy fixed cost structure. Assume S & S Air is currently producing at 100% capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this new assumption. S & S AIR 2011 Income Statement Sales $ 36,599,300 Costs $ 26,669,496 Other Expenses $ 4,641,000 Depreciation 1.640,200 EBIT S 3,648,604 Interest Paid 573,200 Taxable income $ 3,075,404 Taxes 1.230,162 Net Income 1,845,242 Dividends 560,000 Addition to Retained Earnings $ 1.285.242 en een S . S&S AIR 2011 Balance Sheet Current Assets Current Liabilities Cash $ 396,900 A/P A/R $ 637,560 N/P Inventory $ 933,400 Total Total $ 1.967,860 Long Term Debt Total Debt Fixed Assets Owners' Equity Net Plant & Equipment $ 15,411,620 Common RE Total Equity S 844,550 $ 1,928,500 $ 2,773,050 $ 5,050,000 $ 7,823,050 $ 322,500 $ 9.233.930 $ 9,556,430 $ 15,411,620 Total Liab & Equity $17,379,480