Ross5eChap03sm - Chapter 3 Financial Planning and Growth...

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Answers to End–of–Chapter Problems B– 14 Chapter 3: Financial Planning and Growth 3.2 a. First, we need to calculate the current sales and change in sales. The current sales are next year’s sales divided by one plus the growth rate, so: Current sales = Next year’s sales / (1 + g ) Current sales = $440,000,000 / (1 + .10) Current sales = $400,000,000 And the change in sales is: Change in sales = $440,000,000 – 400,000,000 Change in sales = $40,000,000 We can now complete the current balance sheet. The current assets, fixed assets, and short– term debt are calculated as a percentage of current sales. The long–term debt and par value of stock are given. The plug variable is the additions to retained earnings. So: Assets Liabilities Current Assets $80,000,000 Short–term debt $60,000,000 Long–term debt 145,000,000 Fixed Assets 560,000,000 Common stock 50,000,000 Retained earnings 385,000,000 Total equity $435,000,000 Total Assets $640,000,000 Total liabilities and equity $640,000,000 b. We can use the equation from the text to answer this question. The assets/sales and debt/sales are the percentages given in the problem, so: ( )( ) Assets Debt EFN Sales Sales ProfitMargin Sales 1- DvdPayout Sales Sales ! " ! " = # $ # $ % & % & ( ( EFN = (.20 + 1.40) × $40,000,000 – (.15 × $40,000,000) – [(.12 × $440,000,000) × (1 – .40)] EFN = $26,320,000 c. The current assets, fixed assets, and short–term debt will all increase at the same percentage as sales. The long–term debt and common stock will remain constant. The accumulated retained earnings will increase by the addition to retained earnings for the year. We can calculate the addition to retained earnings for the year as: Net income = Profit margin × Sales Net income = .12 x $440,000,000 Net income = $52,800,000
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Answers to End–of–Chapter Problems B– 15 The addition to retained earnings for the year will be the net income times one minus the dividend payout ratio, which is: Addition to retained earnings = Net income(1 – d) Addition to retained earnings = $52,800,000(1 – .40) Addition to retained earnings = $31,680,000
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