CHAPTER 4

# CHAPTER 4 - Equity increased by Equity increase = \$12,190...

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CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. It is important to remember that equity will not increase by the same percentage as the other assets. If every other item on the income statement and balance sheet increases by 15 percent, the pro forma income statement and balance sheet will look like this: Pro forma income statement Pro forma balance sheet Sales \$ 26,450 Assets \$ 18,170 Debt \$ 5,980 Costs 19,205 Equity 12,190 Net income \$ 7,245 Total \$ 18,170 Total \$ 18,170 In order for the balance sheet to balance, equity must be: Equity = Total liabilities and equity – Debt Equity = \$18,170 – 5,980 Equity = \$12,190

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Unformatted text preview: Equity increased by: Equity increase = \$12,190 – 10,600 Equity increase = \$1,590 Net income is \$7,245 but equity only increased by \$1,590; therefore, a dividend of: Dividend = \$7,245 – 1,590 Dividend = \$5,655 must have been paid. Dividends paid is the plug variable. 2. Here we are given the dividend amount, so dividends paid is not a plug variable. If the company pays out one-half of its net income as dividends, the pro forma income statement and balance sheet will look like this: Pro forma income statement Pro forma balance sheet Sales \$26,450.00 Assets \$18,170.00 Debt \$ 5,980.00 Costs 19,205.00 Equity 14,222.50 Net income \$ 7,245.00 Total \$18,170.00 Total \$19,422.50 Dividends \$3,622.50 Add. to RE \$3,622.50 Note that the balance sheet does not balance. This is due to EFN. The EFN for this company is: EFN = Total assets – Total liabilities and equity EFN = \$18,170 – 19,422.50 EFN = –\$1,252.50 3. An increase of sales to \$7,424 is an increase of:...
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CHAPTER 4 - Equity increased by Equity increase = \$12,190...

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