Finc400 Week 2
Chapter 4
Problems
1. Growth and financing (LO4) Philip Morris is excited because sales for his clothing company are expected to double from $500,000 to $1,000,000 next year. Philip notes that net assets (Assets Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $100,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take. Does his optimistic outlook for his cash position appear to be correct?
Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit.
4-1. Solution:
Philip Morris
Beginning cash $100,000
– Asset buildup (250,000) (1/2 × $500,000)
Profit 90,000 (9% × $1,000,000)
Ending cash ($60,000) Deficit
2. Growth and financing (LO4) In Problem 1 if there had been no increase in sales and all other facts were the same, what would Philip’s ending cash balance be? What lesson do the examples in Problems 1 and 2 illustrate?
4-2. Solution:
Philip Morris (continued)
Beginning cash $100,000
No asset buildup -----
Profit 45,000 (9% × $500,000)
Ending cash $145,000
The lesson to be learned is that increased sales can increase the financing requirements and reduce cash even for a profitable firm. 3. Growth and financing (LO4) Galehouse Gas Stations Inc., expects sales to increase from $1,500,000 to $1,700,000 next year. Mr. Galehouse believes that net assets (Assets Liabilities) will represent 70% of sales. His firm has a 10 percent return on sales and pays 40% of profits out as dividends.
a. What effect will this growth have on funds?
b. If the dividend payout is only 15%, what effect will this growth have on funds?
4-3. Solution:
Galehouse Gas Stations, Inc.
a. Asset buildup ($140,000) (70% × $200,000) Profit 170,000 (10% × $1,700,000) Dividends (68,000) (40% × $170,000) Change in
Problems
1. Growth and financing (LO4) Philip Morris is excited because sales for his clothing company are expected to double from $500,000 to $1,000,000 next year. Philip notes that net assets (Assets Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $100,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take. Does his optimistic outlook for his cash position appear to be correct?
Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit.
4-1. Solution:
Philip Morris
Beginning cash $100,000
– Asset buildup (250,000) (1/2 × $500,000)
Profit 90,000 (9% × $1,000,000)
Ending cash ($60,000) Deficit
2. Growth and financing (LO4) In Problem 1 if there had been no increase in sales and all other facts were the same, what would Philip’s ending cash balance be? What lesson do the examples in Problems 1 and 2 illustrate?
4-2. Solution:
Philip Morris (continued)
Beginning cash $100,000
No asset buildup -----
Profit 45,000 (9% × $500,000)
Ending cash $145,000
The lesson to be learned is that increased sales can increase the financing requirements and reduce cash even for a profitable firm. 3. Growth and financing (LO4) Galehouse Gas Stations Inc., expects sales to increase from $1,500,000 to $1,700,000 next year. Mr. Galehouse believes that net assets (Assets Liabilities) will represent 70% of sales. His firm has a 10 percent return on sales and pays 40% of profits out as dividends.
a. What effect will this growth have on funds?
b. If the dividend payout is only 15%, what effect will this growth have on funds?
4-3. Solution:
Galehouse Gas Stations, Inc.
a. Asset buildup ($140,000) (70% × $200,000) Profit 170,000 (10% × $1,700,000) Dividends (68,000) (40% × $170,000) Change in