FIN 300 Lecture Notes - Lecture 2: Tax Shield, European Route E20, Economic Model

153 views5 pages

danotehustla

9 Oct 2017

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

18. 2 forecasting financial statements: the percent of sales method. Identify important linkages: sales, costs, capital investment, financing, etc, analyze the impact of potential business plans, plan for future funding needs. Kxs has just revised its sales forecast downward. If kms expects sales to grow by only 10% next year, what are its costs except for depreciation projected to be: forecasted 2015 sales will now be: 74,889 (1. 10) = 82,378. With this figure in hand and the information from table 18. 1, we can use the percent of sales method to calculate its forecasted costs: from table 18. 1, we see that costs are 78% of sales. With forecasted sales of ,378, that leads to forecasted costs except depreciation of $ 82,378 (0. 78) = ,255. If costs remain a constant 78% of sales, then our best estimate is that they will be $ In 2014: costs excluding depreciation were 78% of sales, depreciation was 7. 333% of sales.

Related Questions

Decide upon an initiative you want to implement that would increase sales over the next five years, (for example, market another product, corporate expansion, and so on). Using the sample financial statements, create pro forma statements of five year projections that are clear, concise, and easy to read. Be sure to double check the calculations in your pro forma statements. Make assumptions that support each line item increase or decrease for your forecasted statements. Discuss and interpret the financials in relation to the initiative. Make recommendations on potential discretionary financing needs. Write a 350 - 700 word analysis of the company's short term and long term financing needs and determine strategies for the company to manage working capital.

Additional funds needed

Morrissey Technologies Inc.'s 2012 financial statements are shown here.

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2012
Cash	$180,000	Accounts payable	$360,000
Receivables	360,000	Notes payable	56,000
Inventories	720,000	Accrued liabilities	180,000
Total current assets	$1,260,000	Total current liabilities	$596,000
		Long-term debt	100,000
Fixed assets	1,440,000	Common stock	1,800,000
		Retained earnings	204,000
Total assets	$2,700,000	Total liabilities and equity	$2,700,000

Morrissey Technologies Inc.: Income Statement for December 31, 2012
	Sales	$3,600,000
	Operating costs including depreciation	3,279,720
	EBIT	$320,280
	Interest	20,280
	EBT	$300,000
	Taxes (40%)	120,000
	Net Income	$180,000
	Per Share Data:
	Common stock price	$45.00
	Earnings per share (EPS)	$1.80
	Dividends per share (DPS)	$1.08

Suppose that in 2013, sales increase by 15% over 2012 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2012 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its Operating costs/Sales ratio to 89.5% and increase its total debt-to-assets ratio to 30%. (It believes that its current debt ratio is too low relative to the industry average.) The firm will raise 30% of 2013 forecasted total debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short-term and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent.

Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2013
	2012	2013 Pro Forma
Sales	$3,600,000	$
Operating costs (includes depreciation)	3,279,720	$
EBIT	$320,280	$
Interest expense	20,280	$
EBT	$300,000	$
Taxes (40%)	120,000	$
Net Income	$180,000	$
Dividends	$	$
Addition to RE	$	$

Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2013
	2012	2013 Pro Forma
Cash	$180,000	$
Accounts receivable	360,000	$
Inventories	720,000	$
Fixed assets	1,440,000	$
Total assets	$2,700,000	$
Payables + accruals	$540,000	$
Short-term bank loans	56,000	$
Total current liabilities	$596,000	$
Long-term bonds	100,000	$
Total debt	$696,000	$
Common stock	1,800,000	$
Retained earnings	204,000	$
Total common equity	$2,004,000	$
Total liab. and equity	$2,700,000	$

If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In otherwords, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places.
%

brownmink51

Question 8

Which of the following is NOT one of the steps taken in the financial planning process?
Answer Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.
Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
Determine the amount of capital that will be needed to support the plan.
Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
.2 points
Question 9

Which of the following statements is CORRECT?
Answer Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
.2 points
Question 10

Spontaneous funds are generally defined as follows:
Answer Assets required per dollar of sales.
A forecasting approach in which the forecasted percentage of sales for each item is held constant.
Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm

FIN 300 Lecture Notes - Lecture 2: Tax Shield, European Route E20, Economic Model

Document Summary

Get access

Related Documents

FIN 300 Lecture Notes - Lecture 3: Pro Forma, Cash Flow

FIN 300 Lecture Notes - Lecture 3: Pro Forma, Income Statement, Capital Expenditure

FIN 300 Study Guide - Midterm Guide: Net Present Value, Tax Shield, 1Time Airline

Related Questions