Financial Planning and Forecasting - Solutions6

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Old Exam Questions - Financial Planning and Forecasting - Solutions Page 51 of 57 Pages 1. Sales are expected to increase by 20 percent over the coming year -- they will increase to $12,000,000. 2. Operating costs are expected to decrease to 58 percent of sales. 3. 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. 4. The tax rate, currently 35 percent, is expected to increase to 40 percent in 2008. 5. The firm expects to maintain its dividend payout rate at 50 percent. 6. All current assets will increase proportionately with sales. 7. At the end of 2007, fixed assets (property plant and equipment) are being operated at only 90 percent of capacity. 8. Fixed assets are lumpy. If the firm must increase its fixed assets, it will do so by adding an amount equal to $2,000. 9. 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. 10. Accounts payable and accruals will increase proportionately with sales. 11. 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. Income Statement 2007 2008 (1st) 2008 (2nd) Sales $10,000.00 $12,000.00 $12,000.00 Operating Costs -$6,000.00 Depreciation -$1,200.00 EBIT $2,800.00 Interest -$600.00 EBT $2,200.00 Taxes (35%/40%) -$770.00 Net Income $1,430.00 Dividends Paid Out $715.00 Assets 2007 2008 (1st) 2008 (2nd) Cash $1,000.00 Accounts Receivable $2,800.00 Inventories $4,000.00 Current Assets $7,800.00 Gross Plant & Equipment $12,000.00 Less: Depreciation -$4,800.00 Net Plant & Equipment $7,200.00 Total Assets $15,000.00
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Old Exam Questions - Financial Planning and Forecasting - Solutions Page 52 of 57 Pages Liabilities & Equity 2007 2008 (1st) 2008 (2nd) Accounts Payable $3,000.00 Notes Payable $4,000.00 Accruals $2,000.00 Current Liabilities $9,000.00 Long-Term Debt $2,000.00 Common Stock $3,500.00 Retained Earnings $500.00 Total Liabilities & Equity $15,000.00 Additional Funds Needed A. 24.08% * B. 26.82% C. 25.45% D. 29.56% E. 28.19% Income Statement 2007 2008 (1st) 2008 (2nd) Sales $10,000.00 $12,000.00 $12,000.00 Operating Costs -$6,000.00 -$6,960.00 -$6,960.00 Depreciation -$1,200.00 -$1,400.00 -$1,400.00 EBIT $2,800.00 $3,640.00 $3,640.00 Interest -$600.00 -$440.00 -$440.00 EBT $2,200.00 $3,200.00 $3,200.00 Taxes (35%/40%) -$770.00 -$1,280.00 -$1,280.00
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