Ross4eChap03sm

Ross4eChap03sm - Chapter 3: Financial Planning and Growth...

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Chapter 3: Financial Planning and Growth 3.1 From the relationship, S = .00001 x GNP, we can get forecast sales: S = 0.00001; GNP = 0.00001 ($2,050 trillion) = $20,500,000 Now, compute the other values: Projected Current Assets = Current Assets + Current Assets: CA = $500,000 + 0.25 ($20,500,000) = $5,625,000 Similar for rest: FA = $1,000,000 + 0.50 ($20,500,000) = $11,250,000 CL = $100,000 + 0.10 ($20,500,000) = $2,150,000 and: NP = 0.02 ($20,500,000) = $410,000 Compute the new amount of retained earnings: RE = NP ( 1 - dvd payout ratio) = NP (1 - 0.34) = $410,000 (0.66) = $270,600 RE = $3,400,000 + $270,600 = $3,670,600 Compute the new amount of bonds: Debt-to-Asset Ratio = Total Debt / Total Assets = ($1,100,000 + $2,500,000) / ($3,000,000 + $6,000,000) = 0.40 Bonds = [ Total Assets x Debt/Asset ratio ] - Current Liabilities = [(CA + FA) x 0.40] - CL = ($5,625,000 + $11,250,000) (0.40) - $2,150,000 = $4,600,000 Compute the new amount of stock: Use: Total Assets Total Liabilities + Total Equity, then Stock = [(CA + FA) - (CL + Bonds + RE)] = ($5,625,000 + $11,250,000) - ($2,150,000 + 4,600,000 + 3,670,600) = $6,454,400 And now we can use the above to fill in the Balance Sheet: Balance Sheet Current Assets 5,625,000 Current Liabilities $2,150,000 Fixed Assets 11,250,000 Bonds 4,600,000 Total Assets $16,875,000 Common Stock 6,454,400 Retained Earnings 3,670,600 $16,875,000 Answers to End-of-Chapter Problems B-14
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3.2 First we need to find the change in Sales. Projected Sales are 110% of current sales, so current sales are: S = 330 million / 1.10 = 300 million and S = 300 million x 10% = $30 million a. For external funds needed (in millions) : Current Assets = 25% Sales = .25(30) Fixed Assets = 150% Sales = 1.50(30) Short Term Debt = 40% Sales = .40(30) Long Term Debt = 45% Sales = .45(30) and using the formula from the book: ( 29 ( 29 Assets Debt EFN Sales Sales ProfitMargin Sales 1- DvdPayout Sales Sales = - - = (25% +150%) x 30 - (40% + 45%) x 30 - (12% x 330) (1 - 40%) = $3.24 million b. Current assets = 25% x 330 / (1 + 10%) = 75 Fixed assets = 150% x 330 / (1+10%) = 450 Total assets = Current assets + Fixed assets = 75 + 450 = $525 million Short term debt = 40% x 330 / (1+10%) = 120 Long term debt = 45% x 330 / (1 + 10%) = 135
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This note was uploaded on 03/17/2009 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.

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Ross4eChap03sm - Chapter 3: Financial Planning and Growth...

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