The company’s interest expense is expected to remain at $200 million, and the tax rate will remain at 40 percent. The company plans to pay out 50 percent of its net income as dividends, the other 50 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for the next year? a. $1,140 b. $1,260 c. $1,440 d. $1,790 e. $1,810 Medium: (9.3) Additional funds needed Answer: c Diff: M 31 . Brown & Sons recently reported sales of $100 million, and net income equal to $5 million. The company has $70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales in- crease 20 percent, spontaneous liabilities will increase by $2 million. If the company’s sales increase, its profit margin will remain at its current level. The company’s dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order to support the 20 percent increase in sales? a. $ 2.0 million b. $ 6.0 million c. $ 8.4 million d. $ 9.6 million e. $14.0 million Chapter 9: Financial Planning and Forecasting Financial Statements Page 9
(9.3) Expected growth rate Answer: d Diff: M 32 . Apex Roofing Inc. has the following balance sheet (in millions of dol- lars): Current assets $3.0 Accounts payable $1.2 Net fixed assets 4.0 Notes payable 0.8 Accrued wages and taxes 0.3 Total current liabilities $2.3 Long-term debt 1.2 Common equity 1.5 Retained earnings 2.0 Total assets $7.0 Total liabilities and equity $7.0 Last year's sales were $10 million, and Apex estimates it will need to raise $2 million in new debt and equity next year. You have identified the following facts: (1) it pays out 30 percent of earnings as divi- dends; (2) a profit margin of 4 percent is projected; (3) fixed assets were used to full capacity; and (4) assets and spontaneous liabilities as shown on last year's balance sheet are expected to grow proportion- ally with sales. If the above assumptions hold, what sales growth rate is the firm anticipating? (Hint: You can use the AFN equation to help answer this problem.) a. 187% b. 51% c. 97% d. 44% e. 26% Page 10 Chapter 9: Financial Planning and Forecasting Financial Statements
(9.3) Expected growth rate Answer: e Diff: M 33 . Your company has the following balance sheet (in millions of dollars): Current assets $4.0 Accounts payable $0.8 Net fixed assets 4.0 Notes payable 1.0 Accrued wages and taxes 0.2 Total current liabilities $2.0 Long-term debt 1.5 Common equity 1.5 Retained earnings 3.0 Total assets $8.0 Total liabilities and equity $8.0 You have determined the following facts: (1) last year's sales were $10 million; (2) the company will pay out 40 percent of earnings as divi- dends; (3) a profit margin of 3 percent is projected; (4) fixed assets were used to full capacity; and (5) all assets as well as spontaneous liabilities as shown on the balance sheet are expected to grow propor- tionally with sales. Further, your boss estimates she will need to raise $2 million externally by issuing new debt or common stock next year.