Quiz 4

Pages: 7 (1481 words) Published: September 19, 2012
Week 5 : Capital Budgeting Tools and Analysis/Cash Flow Estimation and Risk Analysis - Quiz#4

1.
Brown & Sons recently reported sales of \$100 million, and net income equal to \$5 million.  The company has \$70 million in total assets.  Over the next year, the company is forecasting a 10 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales.  The company also estimates that if sales increase 10 percent, spontaneous liabilities will increase by \$1 million.  If the company’s sales increase, its profit margin will remain at its current level.  The company’s dividend payout ratio is 30 percent.  Based on the AFN formula, how much additional capital must the company raise in order to support the 10 percent increase in sales?

7.Brown & Sons recently reported sales of \$100 million, and net income equal to \$5 million. The company has \$70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that is sales increase 20 percent, spontaneous liabilities will increase by \$2 million. If the company’s sales increase, its profits margin will remain at its current level. The company’s dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order to support the 20 percent increase in sales?

a.\$2,000,000
b.\$6,000,000
THISSSSSSSSSSSSSSSSSSS c.\$8,400,000
d.\$9,600,000
e.\$14,000,000

.Brown & Sons recently reported sales of \$100 million, and net income equal to \$5 million. The company has \$70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20 percent, spontaneous liabilities will increase by \$2 million. If the company’s sales increase, its profit margin will remain at its current level. The company’s dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order to support the 20 percent increase in sales?

a.\$ 2,000,000
b.\$ 6,000,000
THISSSSSSSSSSSSSSSSSSSS c.\$ 8,400,000
d.\$ 9,600,000
e.\$14,000,000

AFN =
= (\$70/\$100)(\$20) - \$2 - (0.05)(\$120)(0.6)
= \$14 - \$2 - \$3.6
= \$8.4 million, or \$8,400,000.

2.
Holder Co. has the following balance sheet as of December 31, 2011.
Assets:                                 Claims: Current assets   \$  600,000   Accounts payable            \$  150,000 Fixed assets       600,000           Accruals                       100,000                                            Notes payable                  200,000                                                Total current liabilities \$  450,000

Long-term debt                 350,000                                                Total equity                   400,000   Total assets   \$1,200,000           Total claims              \$1,200,000

In 2011, the company reported sales of \$5 million, net income of \$100,000, and dividends of \$70,000. The company anticipates its sales will increase 20 percent in 2012 and its dividend payout will be 60 percent. Assume the company is at full capacity, so its assets and spontaneous liabilities will increase proportionately with an increase in sales.

Assume the company uses the AFN formula and all additional funds needed (AFN) will come from issuing new long-term debt. Given its forecast, how much long-term debt will the company have to issue in 2012?

8.Jackson Co. has the following balance sheet as of December 31, 2001.

Assets:Claims:
Current assets\$ 600,000Accounts payable\$ 100,000...