Managerial Finance

Pluso Do ?oUWu {2-- ? lL- + ) Ir-,5 Part 5 Corporate Valuation ancl Governance

Easy Problems 1-3

(72-al

AFN Equation

(12-2)

AFN Equation

(a2-31

AFN Equation

Intermediate Problems 4-6

024t Sales Increase

. (12-s) Long-Term Financing

Needed

Broussard Skateboard's sales are expected to increase by 15% fr<-rm $8 million in 20 13 to $9.2 million in 2014. Its assets totaled $5 raillion at the end of 2013. Broussard is already at full capacity, so its assets must grou,' at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $4-50,000 of accounts payable, $-500,000 of notes payable, and $450,000 of accruals. The afler-tax profit margin is forecasted to be 6%, and, the forecasted payout ratio is 407o. Use the AFN equation to forecast Broussard's additional fulds needed for the coming year. Refer to Problem 12-1. What r,vould be tire additional funds needed if the company's year- end 2013 assets had been $7 miliion? Assurne that ali other nurnbers, including sales, are the same as in Probiem 12-1 and that the companlr is operating at fu1l capacify. Why is this AFN different from the one you fbund in Problen.r 12-1? Is the company's "capital intensity" ratio the same or different?

Refer to Problem I2-1. Return to rhe assumption that the company had $5 million in assets at the end of 2013, but now assume that the company pays no dividends. Under these assumptions, what rvould be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem l2-1?

Maggie's Muffins, Inc., generated $5,000,000 in sales during 2013, and its year-end total assets were $2,500,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2014, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 7o/o, and its payout ratio will be 80%. How large a sales increase can the company achieve r.vithout having to raise funds externaliy-that is, what is its self- supporting grr.rwth rate?

At year-end 2013, wallace Landscaping's total assets were $2.17 rnillion and its accounts payable u'ere $560,000. Sales, which in 2013 lvere $3.5 million, are expected to increase by 357o in 2014. Total assets and accounts payable are proportional tcr sales, and that relationship wili be maintained. wallace typlcaily uses no current liabilities other than accounts payable. Common stock amounted to $62-5,000 in 2013, and retained earnings were $395,000. wailace has arranged to sell $19-5,000 of nerv common stock in 2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there wili be no additiolal interest expense due to the nerv debt.) Its net profit margin on sales is 5yo, and 45o/o of earnings wili be paid out as dividends.

a. What were Wallace's total long-term debt and total liabilities in 20i3? b. How much new long-term debt financing will be needed in 2014? (Hlzr: AFN -

New stock = Ne,w, long,term debt.)

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