quiz_solve02

Quiz_solve02 - FNCE 3010(Durham Fall 2007 Quiz 2 Use these financial statements to answer the questions below Balance Sheet(2005 Assets Current

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Unformatted text preview: FNCE 3010 (Durham). Fall 2007. Quiz 2. Use these financial statements to answer the questions below: Balance Sheet (2005) Assets Current Assets Fixed Assets Total Assets 3500 4000 7500 Liabilities & Equity Current Liabilities Long-term debt Owners' Equity Total Liabilities and Equity 3000 2000 2500 7500 Income Statement (2005) Sales Costs (including interest) EBT Taxes Net Income 4500 3000 1500 525 975 Assumptions: -- Costs and asset requirements increase in proportion to sales -- Current liabilities do not increase with sales -- Dividend payout is 60% of net income. Dividend payout ratio and tax rate remain constant. Answer the following questions (show your work): 1. What is the maximum growth rate the firm can achieve without taking on any additional debt? Solution: ROA = 975/7500 = 0.13 b = .4 IGR = (b x ROA) / ( 1 - b x ROA ) = .0549 2. How much additional long-term debt would be required to achieve a sales growth target of 15% if no new equity is raised? Solution: NI = 1121.25 Add. to RE = 448.5 Assets = 4025 + 4600 = 8625 Equity = 2500 + 448.5 = 2948.5 EFN = 8625 - 2948.5 - 2000 - 3000 = 676.5 3. Suppose that in order to reach the 15% sales growth target, a new factory costing $1500 is required. What is the EFN? If the firm's fixed assets were operating at 100% in 2005, what will the utilization rate be when the firm builds the new factory (assuming they meet their sales target)? Solution: As before, but Assets = 4025 + 5500 = 9525, so EFN = 9525 - 2948.5 - 2000 - 3000 = 1576.5 Utilization = 4600 / 5500 = .8364 ...
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This note was uploaded on 03/31/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Fall '07 term at Colorado.

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