Finance questions for pavan 1001

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Current assets

Net fixed assets

Total

Accounts payable

Accrued expenses

Notes payable

Current liabilities

Long-term debt

Total liabilities

Common stock (par)

Paid-in capital

Retained earnings

Common equity

Total

$12,090,000

17,730,000

$29,820,000

$2,030,000

1,980,000

1,410,000

$5,420,000

6,450,000

$l1,870,000 930,000

2,080,000

14,940,000

$17,950,000

$29,820,000

Current assets

Net frxed assets

Total

Accounts payable

Accrued expenses

Notes payable

Current liabilities

Long-term debt

Total liabilities

Common stock (par)

Paid-in capital

Retained earnings

Common equity

Projected sources of financing

Discretionary financing needs

Total financing needs: Total assets

$24,180,000

35,460,000

$59,640,000

$4,060,000

3,960,000

1,410,000

$9,430,000

6,450,000

s15,890,000

930,000

2,080,000

14,940,000

$ 17,950,000

$33,830,000

Page I

Qu6floJ

Sales

Variable costs

Revenue before fixed costs

Fixed costs

EBIT

Interest expense

Earnings before taxes

Taxes (50Yo)

Net income

$ 45,708,000 (22,815,000)

$ 22,893,000 , (9,230,000)

$ 13,663,000 (1,393,000)

$ 12,270,000 (6,135,000)

$ 6.135,000

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Pl7-l (similar to).

(Ffuancial forecasting) Zapateru Enterprises is evaluating its financing requirements for the coming year. The frm has only been in business for one year, but its CFO predicts that the firm's operating expenses, current assets, net fixed assets, and current liabilities will remain at their currentproportion ofsales. ^ / Last year iapateruhad@miflion in sales wi.t! net income of ${mi[ion. The firm arrticipates that next yef,fs sales will reach $ffi6mi11ion with o"fircrm" risrng to-ry#million. Given its present high rate of growth, the firm retains all of its earnings to help defray the cost of new invesffients.

The firm's balance sheet for the year just ended is as followt, i,H};. Estimate Zapatera's total financing requirements (total assets) and its net funding requirernents (discretionary financingneeded) far2014. Nofe: Use the percentage of sales given in Zapatera Enterprises' balance sheet for 201 3.

The 2014 retained earnings are $[. (Round to the nearest dollar.)

Complete the pro fonna balance sheet for 2014 below: (Round to the nearest dollar.)

T.apater a Enterpris es, In c.

Pro forma Balance Sheet tzlSlltl Currentassets $l I Net fixed assets

Total

Liabilities and Owners' Equif Accounts payable

Long-term debt

Total liabilities

Common stock

Paid-in capital

Retained eamings

Common equity

t"trt *E

Zapatera's total financing requirements (total assets) for 2014 *" $[. (Round to the nearest dollar.)

Zapatera-snet funding requirements (discretionary financing needed) for Z}l4rre $[. (Round to the nearest dollar.)

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Data Table

Zapatcra Enterprlses, Int.

Current assets

Net fixed assets

Total

Liabilities and Owners- Equif Accounts payable

Long-term debt

Total liabilities

Commoa stock

Paid-in capital

Retained earnings

Commoncquity

Total

3,300,000

6,000,000

9,300,000

3,500,000

l,90o,ooo

29.81%

NAU

NAU

NAA

l,3oo,oo0

2,200,000

400,000

3,900,000

NAe. This figure does not vary directly with sale,s and is assumed to remain cmstant for purposes of forec'asting n€xt yeads financing requirements.

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ToN Qm-ltct.l

(Leverage and EPS) You have developed the following pro forma income statement for your corporation:.-. im,. It represents the most recent year's operations, which snded yesterday. Your zupervisor in the controller's office has just handed you a memorandum asking for written responses to the following questions:

a. If sales should increase by 30 percent, by what percent would earnings before interest and taxes and net income increase? b. If sales should decrease by 30 percent, by what percent would earnings before interest and taxes and net income decrease? c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to parts a and b?

STEP 1: Picture the Problem

Finaneial leverage has the effect of magnifying the effects of changes in the firm's eamings in response to changes in the fir:n's sales and operating income.

STEP 2: Decide on a Solution Strategy

We can calculate earnings before interest and taxes and net income under different scenarios by completing the following income staternent:

Sales

Variable costs

Revenue before fixed costs

Fixed costs

EBIT

Interest expense

Earnings before taxes

Taxes (50%)

Net income

a. If sales should increase by 30Yo, by what percent would earnings before interest and taxes and net income increase?

STEP 3: Solve

We complete the company's income statementunder a30Yo sales increase scenario:

Sales

Variable costs

$ 59,491,900 (29,694,600)

Page 1

Revenue before fixed costs

Fixed costs

EBIT

Interest expense

Earnings before taxes

Taxes (50%)

Net income

$ 29,797,300 (9,213,000)

s 20,584,300 (1,362,000)

$ 19,222,300 (9,61I,150)

$ 9.611.150

The percentage change in earnings before interest and taxes is:

Percentage Change in Earnings Before hrterest:

The percentage change in net income is:

$20,584,300 - $ 13,708,000 $13,708,000

:0.5015:50.16%

Percentage Change in Net Income: $9,61 1,150 - $6,173,000

$6,173,000 : 0.5570 = 55.70o/"

b. If sales should decrease by 30Yo, by what percent would earnings before interest and taxes and net income decrease?

STEP 3: Solve

tVe complete the companls inconne statement under a 3}ort sales deqrease scenario:

Sales

Variable costs

Revenue before fixed costs

Fixed costs

EBIT

Interest expense

Earnings before taxes

Taxes (50olo)

Net income

$ 32,A34.J0A (15,989,400)

$ 16,044,700 (9,213,000)

$ 6,831,700 (1,362,000)

$ 5,469,700 (2,734,95O\

$ 2,734.8sA

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_ $6,831 ,700 - $ 13,709,000 Percentage Change in Earnings Before Interest:

$13J0g60 -:

- 0"5016: - 50"16%

The percentage change in net income is:

Percentage Change in Net Income : 92,7 34,850 - $6, I 73,000 : -0.5570: -55.70o/o

$6,173,000

c. If the firm were to reduce its reliance on debt financing such tlat interest expense were cut in half, how would this affect your answers to parts a and b?

STEP 3: Solve

We complete the company's income statement under a3oo/o sales increase and 50% interest expense decrease scenario:

Sales

Variable costs

Revenue before fixed costs

Fixed costs

EBIT

Interest expense

Ea:nings before taxes

Taxes (50olo)

Net income

$ 59,491,900 Q9,694,600)

g 29,797,300 (9,213,000)

$ 20,584,300 (681,000)

$ 19,903,300 (9,951,650)

$ 9.951.650

The percentage change in earnings before interest and taxes is:

_ s20,584,300 - $13,709,000 Percentage Change in Earnings Before Interest

$l3J0gp00 :0.5016: 50.16%

The percentage change in net income is:

_ $9,951,650 - $6,173,000 Percentage Change in Net Income:

S6J?3$00 : 0.6121 : 6l.2lYa

We complete tle company's income statement under a30Yq sales decrease and 50olo expense decrease scenario:

Sales

Variable costs

s 32,034,100 (15,999,400)

Page 3

Revenue before fixed costs $ 16,044,700 Fixed costs (9,213,000) EBIT $ 6,831,700 lnterest expense (681,000) Eamings before taxes S 6,150,700 Taxes (sOYr) (3,075,350) Net income $ 3,075.350

The percentage chaoge in earnings before interest and taxes is:

_ $6,831,700-$13,708,000 PercentageChangeinEarningsBeforetrnterest:

$13J0gp00 : -0.5016: - 5A.l6Y.

The percentage change in net income is:

_ $3,075,350 - $6,173,000 PercentageChangeinNetlncome:

S6J?3S00 : -0.5018: -50.18o/o

STEP 4: Analyze

If sales increase 3OYo, and assuming that variable costs remain at$22,842,000 / $45,763,000:49.91368573% of sales, then we find that net income rises 55.70%, while EBIT rises 50.16%. The effect on net income is magnified, since the interest charges incurred by the firm do not rise as EBIT rises. We see these effects in reverse when sales fall by 30%. The larger effect on net income is an example of the leverage effect.

If the firm reduces its leverage, it will change this leverage effect. The effects on EBIT are unaffected, of course, but now lve see that net income rises 61.21% (more than the initial 55.70yo) when sales rise by 3oo/o, and falls 50.18% (less than the initial 55.7$yo) when sales fall30Yo. With lower interest charges, more of the firm's operating cash flows flow through to the equityholders.

Data Table

$ 45,763,000 (22,942,000\

Revenue before fixed costs $ 22,921,000

Sales

Variable costs

Fixed costs

EBIT

Interest expense

(9,213,000)

$ 13,708,000 (1,362,000)

Earnings before taxes $ 12,346,000

Page4

Taxes (50%)

Net income

(6,173,000)

$ 6.173.000

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