Financial Planning and Forecasting - Solutions2

Financial Planning and Forecasting - Solutions2 - Long-Term...

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Old Exam Questions - Financial Planning and Forecasting - Solutions Page 11 of 57 Pages Long-Term Debt $210.00 $210.00 Common Stock $382.00 $350.00 Retained Earnings $168.00 $219.00 Total $1,010.00 $1,219.00 AFN N/A $896.00 4. Now assume that the AFN determined above will be raised in the form of additional long-term debt. Also assume that the interest rate on this additional debt will be 10 percent. Finally, assume that the firm plans to maintain its dividend payout rate at 50 percent of net income, where the new level of net income will now account for the increase in interest expense. Do a second pass incorporating financial feedback effects and calculate the new level of additional funds needed (AFN). * A. $26.88 B. $37.39 C. $32.76 D. $49.64 E. $43.13 Income Statement Year 2 Year 3 First Pass Year 3 Second Pass Sales $1,200.00 $1,800.00 $1,800.00 Operating Costs -$1,020.00 -$1,440.00 -$1,440.00 Depreciation -$55.00 -$155.00 -$155.00 EBIT $125.00 $205.00 $205.00 Interest -$25.00 -$35.00 -$124.60 EBT $100.00 $170.00 $80.40 Taxes (40%) -$40.00 -$68.00 -$32.16 Net Income $60.00 $102.00 $48.24 Dividends $40.00 $51.00 $24.12 Assets Year 2 Year 3 First Pass Year 3 Second Pass Cash $15.00 $50.00 $50.00 Accounts Receivable $200.00 $300.00 $300.00 Inventories $250.00 $375.00 $375.00 Current Assets $465.00 $725.00 $725.00 Gross Plant & Equipment $1,100.00 $2,100.00 $2,100.00 Less: Depreciation -$555.00 -$710.00 -$710.00 Net Plant & Equipment $545.00 $1,390.00 $1,390.00 Total $1,010.00 $2,115.00 $2,115.00
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Old Exam Questions - Financial Planning and Forecasting - Solutions Page 12 of 57 Pages Liabilities & Equity Year 2 Year 3 First Pass Year 3 Second Pass Accounts Payable $120.00 $180.00 $180.00 Notes Payable $50.00 $140.00 $140.00 Accruals $80.00 $120.00 $120.00 Current Liabilities $250.00 $440.00 $440.00 Long-Term Debt $210.00 $210.00 $1,106.00 Common Stock $382.00 $350.00 $350.00 Retained Earnings $168.00 $219.00 $192.12 Total $1,010.00 $1,219.00 $2,088.12 AFN N/A $896.00 $26.88 Alternatively, Increase in Interest at 10% - $89.60 Interest Tax Shelter at 40% $35.84 Decrease in Net Income - $53.76 Decline in Dividend (50%) +$26.88 Decline in Additions to Retained Earnings - $26.88 = New AFN 5. Assume that you observe the following percentage returns (in decimal form) for the Market and for Security A. Use regression analysis to determine how the returns for Security A are related to the returns for the Market (that is, calculate its beta or slope coefficient). Based on these results, if the risk-free rate is expected to be 5 percent, and the expected return on the market is expected to be 8 percent, then what is the required rate of return for Firm A based on the capital asset pricing model (CAPM) using the equation for the security market line (SML)? Year Market Security A 1 - .20 -.25 2 - .10 .00 3 .10 .20 4 .00 .35 5 .25 .30 * A. 8.42% B. 8.85% C. 8.27% D. 8.59% E. 8.12% Do the following on your HP-10BII .20 +/- Input .25 +/- Σ +
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Old Exam Questions - Financial Planning and Forecasting - Solutions Page 13 of 57 Pages .10 +/- Input .00 Σ + .10 Input .20 Σ + .00 Input .35 Σ + .25 Input .30 Σ + 0 y,m 0.108606557 (intercept) SWAP 1.139344262 (slope) K = .05 + (.08 - .05)(1.139344262) = 8.42% 6. You have been given the attached information for your company. The company expects sales to grow by 50 percent in 2003 and operating costs should increase in proportion to sales. Fixed assets were being operated at 40 percent of capacity in 2002, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase in proportion to
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Financial Planning and Forecasting - Solutions2 - Long-Term...

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