BA 350 Week 3 Assignment, Chapter 12 Questions
12.3: The following equation is sometimes used to forecast financial requirements:
AFN= (A0*/S0)/(ΔS) – (L0*/S0)(ΔS) – M(S1)(1-POR)
What key assumption do we make when using this equation? Under what conditions might this assumption not hold true?
12–5: What is meant by the term “self-supporting growth rate?” How is this rate related to the AFN equation, and how can that equation be used to calculate the self-supporting growth rate
12-3: Refer to problem 12-1, Return to the assumption that the company had $3 million in assets at the end of 2010, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in problem 12-1?
12-5: At year-end 2010, Bertin Inc.’s total assets were $1.2 million and its accounts payable were $375,000. Sales, which in 2010 were $2.5 million, are expected to increase by 25% in 2011. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Bertin typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2010, and retained earnings were $295,000. Bertin has arranged to sell $75,000 of new common stock in 2011 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 2011. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 6%, and 40% of earnings will be paid out as dividends.
a. What were Bertin’s total long-term debt and total liabilities in 2010?
b. How much new long-term debt financing will be needed in 2011?
(Hint: AFN − New stock = New long-term debt.)
12-7: 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, 2010, is shown here (millions of dollars):
Cash $3.5 Accounts payable $9.0
Receivables 26.0 Notes payable 18.0
Inventories 58.0 Accruals 8.5
Total current assets $87.5 Total current liabilities $35.5
Net fixed assets 35.0 Mortgage loan 6.0
Common stock 15.0
Retained earnings 66.0
Total assets $122.5 Total liabilities and equity 122.5
Sales for 2010 were $350 million and net income for the year was $10.5 million, so the firm’s profit margin was 3.0%. Upton paid dividends of $4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, 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 2011.
a. If sales are projected to increase by $70 million, or 20%, during 2011, use the
AFN equation to determine Upton’s projected external capital requirements.
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 non spontaneous external funds?
c. Use the forecasted financial statement method to forecast Upton’s balance sheet for December 31, 2011. Assume that all additional external capital is raised as a bank loan at the end of the year and is reflected in notes payable (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 2011 as they were in 2010. What is the amount of notes payable reported on the 2011 forecasted balance sheets?