Financial Planning and Forecasting - Solutions5

# Financial Planning and Forecasting - Solutions5 - PM = \$81...

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Old Exam Questions - Financial Planning and Forecasting - Solutions Page 41 of 57 Pages PM = \$81 / \$1,500 = 5.4% DPR = \$32.40 / \$81.00 = 40% AFN = (\$1,100/\$1,500)*(\$300) - (\$250/\$1,500)*(\$300) - (.054)*(\$1,800)*(1-.40) AFN = \$220.00 - \$50.00 - \$58.32 = \$111.68 Alternatively, since assets and liabilities will increase proportionately with sales: AFN = (\$1,100)*(.20) - (\$250)*(.20) - (.054)*(\$1,800)*(1-.40) AFN = \$220.00 - \$50.00 - \$58.32 = \$111.68 27. Using a straight percent of sales forecasting method, you would forecast that inventories would increase to \$312.00 in Year 1 if sales increase by 30 percent (\$240*1.30 = \$312). However, assume that the true relationship was determined by regression analysis to be as follows: Inventory = \$112.50 + (0.085)(Sales) Based on this information, determine the difference in inventory levels forecasted by these two methods. A. \$32.25 B. \$35.25 C. \$30.75 D. \$29.25 * E. \$33.75 New Sales = (\$1,500)*(1.30) = \$1,950 Inventory = \$112.50 + (0.085)(\$1,950) = \$278.25 Difference = \$312.00 - \$278.25 = \$33.75 28. Assume that you wish to use the spreadsheet method to forecast additional funds needed and have made the following assumptions: Sales will increase by 20 percent. Operating costs will decrease from 85 percent of sales down to 82 percent of sales. Cash, accounts receivable, inventories, accounts payable, and accruals can all be expressed as a percent of sales. The firm plans to add \$400 to gross plan and equipment (fixed assets) at the beginning of Year 1. This additional plant and equipment will be depreciated on a straight line basis (no salvage value) over a 10-year life (that is, depreciation on the new equipment will be \$40 per year), while the depreciation on the firm’s current equipment will remain at \$60 per year. The firm has already made arrangements to increase its notes payable to \$300 at the beginning of Year 1, while maintaining its long-term debt at \$200. The interest rate on both of these will be 10 percent.

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Old Exam Questions - Financial Planning and Forecasting - Solutions Page 42 of 57 Pages The firm has already announced that its total dividend to be paid out will be increased by \$7.00 in Year 1. Given this information, do a first pass and determine the amount of additional funds needed for Year 1. A. \$74.00 B. \$80.00 * C. \$77.00 D. \$71.00 E. \$83.00 Income Statement Year 0 Year 1 (1 st ) Year 1 (2 nd ) Sales \$1,500.00 \$1,800.00 Operating Costs -\$1,275.00 -\$1,476.00 Depreciation -\$ 60.00 -\$ 100.00 EBIT \$ 165.00 \$ 224.00 Interest -\$ 30.00 -\$ 50.00 EBT \$ 135.00 \$ 174.00 Taxes (40%) -\$ 54.00 -\$ 69.60 Net Income \$ 81.00 \$ 104.40 Dividends Paid Out \$ 32.40 \$ 39.40 Assets Year 0 Year 1 (1 st ) Year 1 (2 nd ) Cash \$ 20.00 \$ 24.00 Accounts Receivable \$ 200.00 \$ 240.00 Inventories \$ 240.00 \$ 288.00 Current Assets \$ 460.00 \$ 552.00 Gross Plant & Equipment \$1,200.00
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Financial Planning and Forecasting - Solutions5 - PM = \$81...

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