Corporate Finance HW
Rock$tarGirl
homework.docxQuestion 1 :
AFN Equation
Broussard Skateboard's sales are expected to increase by 15% from $7.8 million in 2019 to $8.97 million in 2020. Its assets totaled $2 million at the end of 2019.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 4%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.
Answer:
Question 2 :
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2019, is shown here (millions of dollars):
|
Cash |
$ 3.5 |
|
Accounts payable |
$ 9.0 |
|
Receivables |
26.0 |
|
Notes payable |
18.0 |
|
Inventories |
58.0 |
|
Line of credit |
0 |
|
Total current assets |
$ 87.5 |
|
Accruals |
8.5 |
|
Net fixed assets |
35.0 |
|
Total current liabilities |
$ 35.5 |
|
|
|
|
Mortgage loan |
6.0 |
|
|
|
|
Common stock |
15.0 |
|
|
|
|
Retained earnings |
66.0 |
|
Total assets |
$122.5 |
|
Total liabilities and equity |
$122.5 |
Sales for 2019 were $475 million and net income for the year was $14.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $5.7 million to common stockholders, so its payout ratio was 40%. Its tax rate was 25%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2020. Do not round intermediate calculations.
a. If sales are projected to increase by $85.5 million, or 18%, during 2020, use the AFN equation to determine Upton's projected external capital requirements. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.
$ million
b. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
%
c. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2020. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton's profit margin and dividend payout ratio will be the same in 2020 as they were in 2019. What is the amount of the line of credit reported on the 2020 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2020 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.
Question 3:
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Financing Deficit Garlington Technologies Inc.'s 2019 financial statements are shown below: Income Statement for December 31, 2019
Balance Sheet as of December 31, 2019
Suppose that in 2020 sales increase to $4.4 million and that 2020 dividends will increase to $238,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2019. The long-term bonds have an interest rate of 12%. New financing will be with a line of credit. Assume it will be added at the end of the year. Cash does not earn any interest income. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.
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