MBA 661 chapter 4 1.
Considering each action independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital? a. An increase in the di idend payout ratio. !. A decrease in the profit margin. c. A decrease in the days sales outstanding. d. An increase in e"pected sales growth. e. A decrease in the accrual accounts #accrued wages and ta"es$. A company is forecasting an increase in sales and is using the A&' model to forecast the additional capital that they need to raise. (hich of the following factors are li)ely to increase the additional funds needed #A&'$? a. *he company has a lot of e"cess capacity. !. *he company has a high di idend payout ratio. c. *he company has a lot of spontaneous lia!ilities that increase as sales increase. d. *he company has a high profit margin. e. All of the answers a!o e are correct. ,ill's (igs -nc. had the following !alance sheet last year. Cash Accounts recei a!le -n entory 'et fi"ed assets *otal assets /011 421 321 +4,111 /+6,%11 Accounts paya!le Accrued wages 'otes paya!le Mortgage Common stoc) 4etained earnings *otal lia!ilities and e5uity /+21 121 %,111 %6,211 +,%11 4,111 /+6,%11
%.
+.
,ill has 6ust in ented a non7slip wig for men which she e"pects will cause sales to dou!le from /11,111 to /%1,111, increasing net income to /1,111. 8he feels that she can handle the increase without adding any fi"ed assets. #1$ (ill ,ill need any outside capital if she pays no di idends? #%$ -f so, how much? a. 'o9 :ero !. ;es9 /<,<11 c. ;es9 /1,<11 d. ;es9 /<11 e. 'o9 there will !e a /<11 surplus. 4. =enney Corporation recently reported the following income statement for %111#num!ers are in millions of dollars$. 8ales *otal operating costs >B-* -nterest >arnings !efore ta" #>B*$ *a"es #41?$ 'et income a aila!le to common shareholders /<,111 +,111 /4,111 %11 /+,011 1,2%1 /%,%01
*he company forecasts that its sales will increase !y 11 percent in %11% and its operating costs will increase in proportion to sales. *he company@s interest e"pense is e"pected to remain at /%11 million, and the ta" rate will remain at 41 percent. *he company plans to pay out 21 percent of its net income as di idends, the other 21 percent will !e additions to retained earnings. (hat is the forecasted addition to retained earnings for %11%? a. /1,141 !. /1,%61
c. d. e. 2.
/1,441 /1,<31 /1,011
Brown A 8ons recently reported sales of /111 million, and net income e5ual to /2 million. *he company has /<1 million in total assets. B er the ne"t year, the company is forecasting a %1 percent increase in sales. 8ince the company is at full capacity, its assets must increase in proportion to sales. *he company also estimates that if sales increase %1 percent, spontaneous lia!ilities will increase !y /% million. -f the company@s sales increase, its profit margin will remain at its current le el. *he company@s di idend payout ratio is 41 percent. Based on the A&' formula, how much additional capital must the company raise in order to support the %1 percent increase in sales? a. !. c. d. e. / %.1 million / 6.1 million / 0.4 million / 3.6 million /14.1 million
6.
8plash Bottling's Cecem!er +1st !alance sheet is gi en !elow. Cash Accounts recei a!le -n entory 'et fi"ed assets *otal assets /11 %2 41 <2 /121 Accounts paya!le 'otes paya!le Accrued wages and ta"es Dong7term de!t Common e5uity *otal lia!ilities and e5uity /12 %1 12 +1 <1 /121
8ales during the past year were /111, and they are e"pected to rise !y 21 percent to /121 during ne"t year. Also, during last year fi"ed assets were !eing utili:ed to only 02 percent of capacity, so 8plash could ha e supported /111 of sales with fi"ed assets that were only 02 percent of last year's actual fi"ed assets. Assume that 8plash's profit margin will remain constant at 2 percent and that the company will continue to pay out 61 percent of its earnings as di idends. *o the nearest whole dollar, what amount of nonspontaneous, additional funds #A&'$ will !e needed during the ne"t year? a. /2< !. /21 c. /+6 d. /41 e. /40 <. Ape" 4oofing -nc. has the following !alance sheet #in millions of dollars$. Current assets 'et fi"ed assets /+.1 4.1 Accounts paya!le 'otes paya!le Accrued wages and ta"es *otal current lia!ilities Dong7term de!t Common e5uity 4etained earnings *otal lia!ilities and e5uity /1.% 1.0 1.+ /%.+ 1.% 1.2 %.1 /<.1
*otal assets
/<.1
Dast year's sales were /11 million, and Ape" estimates it will need to raise /% million in new de!t and e5uity ne"t year. ;ou ha e identified the following facts. #1$ it pays out +1 percent of earnings as di idends9 #%$ a profit margin of 4 percent is pro6ected9 #+$ fi"ed assets were used to
full capacity9 and #4$ assets and spontaneous lia!ilities as shown on last year's !alance sheet are e"pected to grow proportionally with sales. -f the a!o e assumptions hold, what sales growth rate is the firm anticipating? #Eint. ;ou can use the A&' e5uation to help answer this pro!lem.$ a. 10<? !. 21? c. 3<? d. 44? e. %6? 0. *he *apley Company is trying to determine an accepta!le growth rate in sales. (hile the firm wants to e"pand, it does not want to use any e"ternal funds to support such e"pansion due to the particularly high interest rates in the mar)et now. Ea ing gathered the following data for the firm, what is the ma"imum growth rate it can sustain without re5uiring additional funds? Capital intensity ratio F 1.% Grofit margin F 11? Ci idend payout ratio F 21? Current sales F /111,111 8pontaneous lia!ilities F /11,111 a. +.6? !. 4.0? c. 2.%? d. 6.1? e. 2.<? Which of the following best describes free cash flow? a. &ree cash flow is the amount of cash flow a aila!le for distri!ution to all in estors after all necessary in estments in operating capital ha e !een made. !. &ree cash flow is the amount of cash flow a aila!le for distri!ution to shareholders after all necessary in estments in operating capital ha e !een made. c. &ree cash flow is the net change in the cash account on the !alance sheet. d. &ree cash flow is e5ual to net income plus depreciation. e. &ree cash flow is e5ual to the cash flow from non7ta"a!le transactions. Han Buren Company has a current ratio F 1.3. (hich of the following actions will increase the company@s current ratio? a. Ise cash to reduce short7term notes paya!le. !. Ise cash to reduce accounts paya!le. c. -ssue long7term !onds to repay short7term notes paya!le. d. All of the answers a!o e are correct. e. Answers ! and c are correct.
3.
11.
