Old Exam Questions - Financial Planning and Forecasting - Solutions
Page 51 of 57 Pages
Sales are expected to increase by 20 percent over the coming year -- they will
increase to $12,000,000.
Operating costs are expected to decrease to 58 percent of sales.
The interest rate on long-term debt will remain at 10 percent for 2008, but the
interest rate on short-term debt, such as notes payable, will go up to 12 percent.
The tax rate, currently 35 percent, is expected to increase to 40 percent in 2008.
The firm expects to maintain its dividend payout rate at 50 percent.
All current assets will increase proportionately with sales.
At the end of 2007, fixed assets (property plant and equipment) are being
operated at only 90 percent of capacity.
Fixed assets are lumpy. If the firm must increase its fixed assets, it will do so by
adding an amount equal to $2,000.
Currently, fixed assets are being depreciated on a straight-line basis over 10
years. Any new fixed assets will also be depreciated on a straight-line basis over
a 10-year period.
Accounts payable and accruals will increase proportionately with sales.
Notes payable will decrease to $2,000 at the start of 2008.
You should now be able to do a “first pass” and determine the firm’s additional funds
needed (AFN) for 2008. Now assume that the additional funds needed will be raised by
issuing new equity, but that the firm will not change its dividend payout rate (i.e., there
will be no financing feedback effects). Given this information, and considering the
issuance of new equity, determine what the firm’s return on equity (ROE) is forecasted to
be for 2008.
Dividends Paid Out
Gross Plant & Equipment
Net Plant & Equipment