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Unformatted text preview: 20. Fixed Assets and Capacity Usage For the company in the previous problem, suppose fixed assets are $583,000 and sales are projected to grow to $730,000. How much in new fixed assets are required to support this growth in sales? 21. Calculating EFN The most recent financial statements for Retro Machine, Inc., follow. Sales for 2008 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts payable increase spontaneously with sales. If the firm is operating at full capacity and no new debt or equity are issued, what is the external financing needed to support the 20 percent growth rate in sales? 84 PART 1 Overview ros82361_ch03.indd ros82361_ch03.indd 84 7/7/08 3:59:09 PM Confirming Pages
www.mhhe.com/rwj RETRO MACHINE, INC. 2007 Income Statement Sales Costs Other expenses Earnings before interest and taxes Interest paid Taxable income Taxes (35%) Net income Dividends Addition to retained earnings $724,000 568,000 9,600 $146,400 19,700 $126,700 44,345 $ 82,355 $ 32,942 49,413 RETRO MACHINE, INC. Balance Sheet as of December 31, 2007 Assets Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment Total assets Liabilities and Owners’ Equity Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Accumulated retained earnings Total Total liabilities and owners’ equity $ 20,000 34,400 60,800 $115,200 $291,200 $ 52,000 7,200 $ 59,200 $124,800 $ 17,000 205,400 $222,400 $406,400 $406,400 22. Capacity Usage and Growth In the previous problem, suppose the firm was operating at only 80 percent capacity in 2007. What is EFN now? 23. Calculating EFN In Problem 21, suppose the firm wishes to keep its debt-equity ratio constant. What is EFN now? 24. EFN and Internal Growth Redo Problem 21 using sales growth rates of 15 and 25 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the relationship between them. 25. EFN and Sustainable Growth Redo Problem 23 using sales growth rates of 30 and 35 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the relationship between them. 26. Constraints on Growth Conversation, Inc., wishes to maintain a growth rate of 14 percent per year and a debt-equity ratio of 0.40. Profit margin is 5.9 percent, and the ratio of total assets to sales is constant at 1.60. Is this growth rate possible? To answer, determine what the dividend payout ratio must be. How do you interpret the result? 27. EFN S A D Define the following: Previous year’s sales Total assets Total debt
Challenge (Questions 24–30) CHAPTER 3 Financial Statements Analysis and Long-Term Planning 85 ros82361_ch03.indd 85 7/9/08 9:27:42 AM Confirming Pages
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.
- Summer '09