Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

The de ratio of the company is de 85000 158000

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Unformatted text preview: ,232 EFN = $3,848 22. First, we need to calculate full capacity sales, which is: Full capacity sales = $929,000 / .80 Full capacity sales = $1,161,250 The full capacity ratio at full capacity sales is: Full capacity ratio = Fixed assets / Full capacity sales Full capacity ratio = $413,000 / $1,161,250 Full capacity ratio = .35565 35 The fixed assets required at full capacity sales is the full capacity ratio times the projected sales level: Total fixed assets = .35565($1,161,250) = $396,480 So, EFN is: EFN = ($183,480 + 396,480) – $675,232 = –$95,272 Note that this solution assumes that fixed assets are decreased (sold) so the company has a 100 percent fixed asset utilization. If we assume fixed assets are not sold, the answer becomes: EFN = ($183,480 + 413,000) – $675,232 = –$78,752 23. The D/E ratio of the company is: D/E = ($85,000 + 158,000) / $322,900 D/E = .7526 So the new total debt amount will be: New total debt = .7526($418,632) New total debt = $315,044 This is the new total debt for the company. Given that our calculation for EFN is the amount that must be raised externally and does not increase spontaneously with sales, we need to subtract the spontaneous increase in accounts payable. The new level of accounts payable will be, which is the current accounts payable times the sales growth, or: Spontaneous increase in accounts payable = $68,000(.20) Spontaneous increase in accounts payable = $13,600 This means that $13,600 of the new total debt is not raised externally. So, the debt raised externally, which will be the EFN is: EFN = New total debt – (Beginning LTD + Beginning CL + Spontaneous increase in AP) EFN = $315,044 – ($158,000 + 85,000 + 13,600) = $58,444 36 The pro forma balance sheet with the new long-term debt will be: MOOSE TOURS INC. Pro Forma Balance Sheet Assets Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment $ $ 30,360 48,840 104,280 183,480 495,600 Liabilities and Owners’ Equity Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity $ $ 81,600 17,000 98,600 216,444 $ $ $ 140,000 278,632 418,632 733,676 Total assets $ 679,080 The funds raised by the debt issue can be put into an excess cash account to make the balance sheet balance. The excess debt will be: Excess debt = $733,676 – 679,080 = $54,596 37 To make the balance sheet balance, the company will have to increase its assets. We will put this amount in an account called excess cash, which will give us the following balance sheet: MOOSE TOURS INC. Pro Forma Balance Sheet Assets Current assets Cash Excess cash Accounts receivable Inventory Total Fixed assets Net plant and equipment Liabilities and Owners’ Equity Current liabilities Accounts payable $ Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity $ $ $ 30,360 54,596 48,480 104,280 238,076 495,600 81,600 17,000 98,600 216,444 $ $ $ 140,000 278,632 418,632 733,676 Total assets $ 733,676 The excess cash has an opportunity cost that we discussed earlier. Increasing fixed assets would also not be a good idea since the company already has enough fixed assets. A likely scenario would be the repurchase of debt and equity in its current capital structure weights. The company’s debt-assets and equity assets are: Debt-assets = .7526 / (1 + .7526) = .43 Equity-assets = 1 / (1 + .7526) = .57 So, the amount of debt and equity needed will be: Total debt needed = .43($679,080) = $291,600 Equity needed = .57($679,080) = $387,480 So, the repurchases of debt and equity will be: Debt repurchase = ($98,600 + 216,444) – 291,600 = $23,444 Equity repurchase = $418,632 – 387,480 = $31,152 Assuming all of the debt repurchase is from long-term debt, and the equity repurchase is entirely from the retained earnings, the final pro forma balance sheet will be: 38 MOOSE TOURS INC. Pro Forma Balance Sheet Assets Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment $ $ 30,360 48,840 104,280 183,480 495,600 Liabilities and Owners’ Equity Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity $ $ 81,600 17,000 98,600 193,000 $ $ $ 140,000 247,480 387,480 679,080 Total assets Challenge $ 679,080 24. The pro forma income statements for all three growth rates will be: MOOSE TOURS INC. Pro Forma Income Statement 15 % Sales 20% Sales Growth Growth $1,068,350 $1,114,800 831,450 867,600 21,850 22,800 $215,050 $224,400 14,000 14,000 $201,050 $210,400 70,368 73,640 $130,683 $136,760 $39,205 91,478 $41,028 95,732 Sales Costs Other expenses EBIT Interest Taxable income Taxes (35%) Net income Dividends Add to RE 25% Sales Growth $1,161,250 903,750 23,750 $233,750 14,000 $219,750 76,913 $142,838 $42,851 99,986 We will calculate the EFN for the 15 percent growth rate first. Assuming the payout ratio is constant, the dividends paid will be: Dividends = ($33,735/$112,450)($130,683) Dividends = $39,205 And the addition to retained earnings will be: Addition to retained earnings = $130,683 – 39,205 39 Addition to retained earnings = $91,478 The new retained earnings on the pro forma balance sheet will be: New retained earnings = $182...
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