Tutorial 9 Answers.pdf - FIN2704 Tutorial 9 Group 9 Garreth Lee Georgi Goh Jamie Lee#1 The most recent financial statements for Summer Tyme Inc are

Tutorial 9 Answers.pdf - FIN2704 Tutorial 9 Group 9 Garreth...

This preview shows page 1 out of 21 pages.

You've reached the end of your free preview.

Want to read all 21 pages?

Unformatted text preview: FIN2704 Tutorial 9 Group 9 Garreth Lee Georgi Goh Jamie Lee #1 The most recent financial statements for Summer Tyme, Inc., are shown here: Assets, costs and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40% dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by exactly 15%. What is the external financing needed? #1 Income Statement Pro-Forma Income Statement Sales $4,200 Sales $4,830 Costs 3,300 Costs 3,795 Taxable Income 900 Taxable Income 1,035 Taxes (34%) 306 Taxes (34%) 352 Net Income $594 Net Income 683 Dividends (40%) 273 Change in RE $410 #1 Balance Sheet Pro-Forma Balance Sheet % of Sales % of Sales Current Assets $3,600 86% Current Liabilities $2,100 Fixed Assets 7,900 188 Long-term debt 3,650 Equity 5,750 Total L & OE $11,500 Total Assets $11,500 274 50% % of Sales % of Sales Current Assets $4,140 86% Current Liabilities $2,415 Fixed Assets 9,085 188 Long-term debt 3,650 Equity 6,160 Total L & OE $12,225 Total Assets External financing needed = $13,225 - $12,224 = $1,000.14 $13,225 274 50% #2 The most recent financial statements for Live Co. are shown here: Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external equity financing is possible. What is the internal growth rate? #2 Internal Growth Rate = ROA x b / [1 - (ROA x b)] ROA = Net Income / Total Assets = 2,262 / 39,150 = 0.0578 b = (Net Income - Dividends) / Net Income = 2,262 - 0.3(2,262) / 2,262 = 0.7 Internal Growth Rate = 0.0578 x 0.7 / [1 - (0.0578 x 0.7) = 4.21% #3 For the company in the previous problem, what is the sustainable growth rate? Sustainable Growth Rate = ROE x b / [1 - (ROE x b)] ROE = Net Income / Total Equity = 2,262 / 21,650 = 0.1045 b = 0.7 (from Q2) Sustainable Growth Rate = 0.1045 x 0.7 / [1 - (0.1045 x 0.7) = 7.89% #4 McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit margin must the firm achieve? Dupont Identity: ROE = Profit margin * Total Asset Turnover * Equity multiplier Sustainable Growth Rate = ROE x b / [1 - (ROE x b)] Total Asset Turnover = 1 / Total assets to sales ratio Equity multiplier = 1 + Debt-equity ratio #4 McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit margin must the firm achieve? Sustainable Growth Rate = ROE x b / [1 - (ROE x b)] b = 1 - 0.3 = 0.7 0.12 = ROE x 0.7 / [(1 - (ROE x 0.7)] 0.12 - 0.084ROE = 0.7ROE 0.784ROE = 0.12 ROE = 0.1531 #4 McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit margin must the firm achieve? Total Asset Turnover = 1 / Total assets to sales ratio = 1 / 0.75 = 1.33 Equity multiplier = 1 + Debt-equity ratio = 1 + 1.20 = 2.20 #4 McCormac Co. wishes to maintain a growth rate 12 percent a year, a debt-equity ratio of 1.20, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at 0.75. What profit margin must the firm achieve? ROE = Profit margin * Total Asset Turnover * Equity multiplier 0.1531 = Profit margin * 1.33 * 2.20 Profit margin = 5.22% #5 You’ve collected the following information about St. Pierre, Inc,: Sales = $195,000 Net income = $17,500 Dividends = $9,300 Total debt = $86,000 Total equity = $58,000 What is the sustainable growth rate for St. Pierre, Inc.? If it does grow at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? What growth rate could be supported with no outside financing at all? #5 What is the sustainable growth rate for St. Pierre, Inc.? Sales = $195,000 Net income = $17,500 Dividends = $9,300 Total debt = $86,000 Total equity = $58,000 Sustainable Growth Rate = ROE x b / [1 - (ROE x b)] b = (Net Income - Dividends) / Net Income = (17,500 - 9,300) / 17,500 = 0.4686 ROE = Net Income / Equity = 17,500 / 58,000 = 0.3017 Sustainable Growth Rate = 0.3017 x 0.4686 / [1 - (0.3017 x 0.4686)] = 16.5% #5 How much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? Sales = $195,000 Net income = $17,500 Dividends = $9,300 Total debt = $86,000 Total equity = $58,000 Profit Margin = Net Income / Sales = 17,500 / 195,000 = 0.08974 New Sales = 195,000 * 1.165 = $227,108.43 Net Income = 0.08974 * 227,108.43 = $20,381.53 Dividends = (9300/17500) * 20,381.53 = $10,831.33 #5 How much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? Sales = $195,000 Net income = $17,500 Dividends = $9,300 Total debt = $86,000 Total equity = $58,000 Total Assets = (86,000+58,000)*1.165 = $167,710.84 Total Liabilities = $86,000 Total Equity = 58,000 + 20,381.53 - 10,831.33 = $67550.20 Total Debt and Equity = 86,000 + 67550.20 = $153,550.20 New Borrowing required = 167710.8 - 153550.20 = $14,160.64 #5 What growth rate could be supported with no outside financing at all? Sales = $195,000 Net income = $17,500 Dividends = $9,300 Total debt = $86,000 Total equity = $58,000 For no outside financing, we find Internal Growth Rate Internal Growth Rate = ROA x b / [1 - (ROA x b)] ROA = Net Income / Assets = 17,500 / 144,000 = 0.1215 b = 0.4686 (From earlier part) Internal Growth Rate = 0.1215 x 0.4686 / [1 - (0.1215*0.4686)] = 6.04% #6 U-Dunno Corporation's Balance Sheet and Income Statement are as shown below. Note that the firm maintains a cash balance as required for its operations (none of its cash is ‘excess cash’): U-Dunno Corporation 2012 and 2013 Balance Sheet #6 U-Dunno Corporation's Balance Sheet and Income Statement are as shown below. Note that the firm maintains a cash balance as required for its operations (none of its cash is ‘excess cash’): U-Dunno Corporation 2013 Income Statement #6 a. Assume that all assumptions for application of the AFN Equation hold (as discussed in your course notes, i.e. the firm is operating at full capacity, it maintains the same operating relationships, payout ratios, etc.). What is U-Dunno Corporation’s AFN given a desired increase in Sales to $1,800,000 for 2014? % Increase in Sales in 2014 = 1,800,000 / 1,600,000 - 1 = 12.5% A* = $1,250,000 Initial Sales = $1,600,000 Change in Sales = $200,000 L* = $130,000 M = 144,000/1,600,000 = 0.09 RR = 1 - [(402,000-330,000) / 144,000] = 0.5 AFN = (1,250,000/1,600,000)*(200,000) - (130,000/1,600,000)*(200,000) - (0.09)(1,800,000)(0.5) = $59,000 #6 b. If Fixed Assets had only been operating at 80% of capacity in 2013, would additional Fixed Assets still be required given desired sales of $1,800,000 for 2014? If not, what would be the resultant AFN required as per the AFN Equation (as covered in your notes)? 100% Capacity Sales = 1,600,000/0.8 = $2,000,000 Estimated Sales = $1,800,000 Operating Capacity = 1,800,000/2,000,000 = 90% < 100% Hence, no additional Fixed Assets required Since no additional Fixed Assets required, AFN falls by 12.5% (growth rate) of 2013 Fixed Assets New AFN = 59,000 - 0.125*450,000 = $2,750 #6 c. Given that Fixed Assets had only been operating at 80% of capacity in 2013, if desired Sales increased to $2,200,000 for 2014 instead, what would be the increase in Fixed Asset requirement? Incremental Sales above 100% capacity = 2,200,000 - 2,000,000 = $200,000 Target Ratio = FA / Capacity Sales = 450,000 / 2,000,000 = 0.225 Additional FA needed for incremental sales of $200,000: Change in FA = 0.225*200,000 = $45,000 ...
View Full Document

  • Fall '19
  • Balance Sheet, Generally Accepted Accounting Principles

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes