4. Your firm reported net income of $75 million in 2004. The firm had sales of $500 million and cost of goods sold was $350 million. The firm’s corporate tax rate was 40 percent and its interest expense was $25 million. The firm’s goal is for its net income to increase by 30 percent in 2003. It predicts that the tax rate and cost of goods sold as a percentage of sales will remain unchanged, while interest expense will increase by 40 percent. What level of sales (to the closest million) will your firm have to generate in 2005 in order to meet its net income goal? Student Response Correct Answer Feedback a. $617 million b. $683 million c. $625 million d. $658 million e. $740 million Feedback: General SOLUTION: New net income = $75 million x 1.3 = $97.5 million; New EBIT = $97.5 million/(1-0.40) + $25 million(1.4) = $197.5 million; New sales = $197.5 million / (1 – 0.70) = $658 million. Score: 0/0.2 5.
A stock market analyst is looking over a rival firm and has forecasted sales of $70 million, EBITDA of $20 million, depreciation expense of $8 million, and amortization expense of $3 million. The company’s tax rate is 40 percent. The company does not expect any changes in its net operating working capital, and this year the company’s planned gross capital expenditures will total $15 million. (Gross capital expenditures represent capital expenditures before deducting depreciation.) What is the company’s forecasted free cash flow for the year? Student ResponseCorrect AnswerFeedback General SOLUTION: FCF = ($20 million - $8 million - $3 million) x (1 – 0.40) + $8 million + 3 million - $15 million – $0 million = $1.4 million. Score: 0.2/0.2 6. A firm has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, credit sales were $250,000. During the year, the accounts receivable account averaged $41,096. It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent. If the resulting increase in accounts receivable must be financed externally, how much external funding will the company need? Assume a 365-day year. Student Response Correct Answer Feedback $39,452
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