Chapter 17 - EOC Solutions

Chapter 17 - EOC Solutions - AnswerstoEndofChapterQuestions...

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Answers to End-of-Chapter Questions 17-1 The need for external financing depends on the following key factors: 1. Sales growth ( S).  Rapidly growing companies require large increases in assets, other  things held constant. 2. Capital intensity (A 0 */S 0 ).  The amount of assets required per dollar of sales, the capital  intensity ratio, has a major effect on capital requirements.  Companies with high assets-to- sales ratios require more assets for a given increase in sales, hence have a greater need for  external financing. 3. Spontaneous liabilities-to-sales ratio (L 0 */S 0 ).  Companies that spontaneously generate a  large amount of funds from accounts payable and accruals have a reduced need for external  financing. 4. Profit margin (M).  The higher the profit margin, the larger the net income available to support  increases in assets, hence the lower the need for external financing. 5. Retention ratio (RR).  Companies that retain a high percentage of their earnings rather than  paying them out as dividends generate more retained earnings and thus need less external  financing. 17-2 False.  At low growth rates, internal financing will take care of the firm’s needs. 17-3 False.  The use of computerized planning models is increasing because of the information they  provide. 17-4 Accounts payable, accrued wages, and accrued taxes increase spontaneously with sales.  Retained earnings increase, but only to the extent that dividends paid do not equal 100% of net  income and the profit margin is positive. 17-5 a. +. b. -.  The firm needs less manufacturing facilities, raw materials, and work in process. c. +.  It reduces spontaneous funds; however, it may eventually increase retained earnings. d. +. e. +. Chapter 17:  Financial Planning and Forecasting Answers and Solutions 1
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f. Probably +.  This should stimulate sales, so it may be offset in part by increased profits. g. 0. h. +. 2 Answers and Solutions Chapter 17:  Financial Planning and Forecasting
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Solutions to End-of-Chapter Problems 17-1 AFN = (A 0 */S 0 ) S – (L 0 */S 0 ) S – MS 1 (RR) $5,000,000 $3,000,000 $1,000,000 –  $5,000,000 $500,000 $1,000,000 – 0.05($6,000,000)(0.3) = (0.6)($1,000,000) – (0.1)($1,000,000) – ($300,000)(0.3) = $600,000 – $100,000 – $90,000 = $410,000. 17-2 AFN =  (0.3) ($300,000)   00,000) (0.1)($1,0 $1,000,000   $5,000,000 $4,000,000 - - = (0.8)($1,000,000) – $100,000 – $90,000 = $800,000 – $190,000 = $610,000. The capital intensity ratio is measured as A
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This note was uploaded on 02/11/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Chapter 17 - EOC Solutions - AnswerstoEndofChapterQuestions...

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