FIN 300 Study Guide - Final Guide: Profit Margin, Net Present Value, Characters Of The Legend Of Zelda

281 views3 pages

ceruleanprairie-dog860

31 Aug 2016

School

Department

Course

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Interest*tax) or roextotalequity cashflows: cashflowtocreditors= interestpaid nnb cashflowtoshareholders= dividendspaid . Netnewequityraised cashflowfromassets= cashflowtocreditors(bondholders) + cashflowtoshareholders(owners) or = operatingcashflow . Or =incinfixedassets + depreciation additionstonwc= endingnwc beginningnwc or operatingcashflow . Netcapitalspending cashflowfromassets shorttermsolvency/liquidityratios: currentratio= c. assets/c. liabilities quickratio= c. assets . Inv/c. liabilities cashratio= cash/c. liabilities intervalmeasure= c. assets / avgdailyoperatingcost longtermsolvency/financialleverageratios: Totaldebtratio= t. assets t. equity/t. assets debtequityratio= t. debt / t. equity or roe/(profit margin*totalassetturnover) efc 1. Longtermdebtratio= longtermdebt / long-term debt + t. equity timesinterestearned= ebit/interest cashcoverageratio= ebit+dep. 2|balance: ta-tl&oe externalfinancingneeded(efn)= a*g - m*s0*(1+g)*rr a=totalassets|g=(s1-s0)/s0|s0=sales this year (t)| s=increase in sales|s1= sales next year (t+1)|m= profit margin (net income/sales rr:retentionratio; percent of net income not paid as dividend)|rr=1-payoutratio or 1- (dividends/netincome) retainedearningasfinance:internalgrowthrate=(roaxrr)/(1-roaxrr) Sourceofcash:inc. acctpayable&notepayable useofcash:inc. acctsrec&inv equitymultiplier= 1+debtequityratio roe=roa x equitymultiplier or. 3|simpleinterest: fv=pv+(r*pv*t) / pv=fv/(1+rt) / t=(fv-pv/[pv*r]) compoundinterest: fv=pv(1+r)^t / pv=fv/(1+r)^t. *pvifa(r,t)=1-[1/(1+r)^t] /r pva=cxpvifa or c=pva/pvifa or pvadue=c*(1-[1/(1+r)^t])/r *(1+r) *pvga= [c/r-g]*[1-(1+g / 1+r)^t] Apv=c*[(1-1/(1+r)^t] / r (c=couponrate*10) 3. addbondvalue ytm/bondyield: pv=c*(1-1/ (1+r)^n /r +facevalue/(1+r)^n (c=couponrt*facev) 2. bondyield=n*r couponrate: 1. bondvalue=[anutypvofcoupons]+[pvoffaceamt] 2. Facev]/(1+r)^n} / (1-1/(1+r)^n)/r 3. c=. 75 -> 12. 97% nominal(r)/real(r)/inflationrate(h): fishereffect: 1+r=(1+r)*(1+h) or r=(1+r)*(1+h)-1 or.

Related Questions

	2013	Proj 2014
Current Assets Cash	$ 20
Accounts Receivable	$ 240
Inventory	$ 240
Total Current Assets	$ 500
Net Plant & Equipment	$ 500
Total Assets	$ 1,000

Liabilities & Owners Equity
Accounts Payable	$ 100
Notes Payable	$ 100
Total Current Liabilities	$ 200
Long Term Debt	$ 100
Total Liabilities	$ 300
Common Stock	$ 500
Retained Earnings	$ 200
Total Stockholders' Equity	$ 700
Total Liabilities, Equity	$ 1,000

Income Statement Sales	$ 2,000
COGS	$ 1,200
Gross profit	$ 800
Selling and Admin Expense	$ 700
EBIT	$ 100
Interest Expense	$ 10	$ 20
EBT	$ 90
Taxes @ 40%	$ 36
Net Income	$ 54
Common Dividend	$ 21.6
Addition to Retained Earnings	$ 32

1) 30% TWO PARTS: A) Using the above data and the AFN equation, compute the additional funds needed for 2014 if sales growth is expected to be 25% and the firm is operating at 100% capacity. B) Use the forecasted financial statements approach to compute additional funds needed if we assume all additional funds will be financed equally with notes payable and long-term debt. Assume "dividend payout ratio" in 2014 is the same ratio with 2013.

plumweasel718

Franco Modigliani and Merton Miller (M & M) are two very famous financial economists that both won the Nobel Prize in Economics for their work in the finance area, particularly in capital structure theories (see the Description of this in the box on page 504 of your text). In their famous 1958 article (see footnote on page 490), they argued that with perfect capital markets, the total value of a firm should not depend on its capital structure. In other words, the total value of a firm would be the same with all equity, or financing with 100% debt. This is the basic MM Proposition I stated on p.493. But, as you should see, the "perfect capital markets" assumes 3 key assumptions, including no taxes or transactions costs dealing with equity or debt. Additionally, a key assumption is that individuals and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows. These assumptions are necessary for the M&M theory on capital structure. For the Proposition M&M II beginning on page 498, still in a perfect capital market which includes no taxes, M&M state that the cost of capital of EQUITY increases with the firm's market value debt-equity ratio. But, when you examine this Proposition more closely, for a new investment the cost of capital will equal the weighted average of the firm's equity and debt costs. What does this mean in practical terms? It means that M&M "loosens" a part of the Proposition I, and admit that the cost of equity does increase as the debt-equity ratio increases. But, if you examine this closely, it means that the OVERALL cost of capital, captured in the WACC stays constant. And, the pre-tax WACC is the same as the after-tax WACC, since there is no tax! If the WACC stays constant while the equity cost increases, the figure also shows that the debt costs are also going up; similarly, if the equity costs are going down, then the debt costs are going down also as the debt-to-value decreases. This is shown on page 500 in Figure 14.1. And, of course, the weights of debt and equity (0/100, 25/75, 50/50, 75/25, 100/0) count. But, in the real-world, the M&M Propositions do not hold....corporations and individuals do have taxes, and do have transactions costs for debt and equity...buying bonds and stocks, for example. So, as we have learned, the Beta coefficient for equity does increase as the amount of debt level increases (due to increasing risks of default of interest payments or repayment of the bonds at maturity)...and the costs of debt increase, but as we weight those, the WACC actually varies, based on the real-world that includes taxes....we normally see the WACC being a U-shaped curved that varies as a function of the debt to equity ratio.

Questions:

1. Discuss the MM Proposition I and MM Proposition II (definition, assumptions, results and implications)? Remember, at the MBA level, more is better. But, to the point, and no "hot air."

2. Assume you are doing a financial analysis for Kroger Inc. Here is one of the income statements that you analyze (all figures in $ Millions):

Which year does Kroger Incorporation have the highest tax shield and why? Be very specific.

Year	2006	2005	2004
Total Sales	60,553	56,434	53,791
Cost of goods sold	45,565	42,140	39,637
Selling, general & admin expenses	11,688	12,191	11,575
Depreciation	1265	1256	1209
Operating Income	2035	847	1370
Other Income	0	0	0
EBIT	2035	847	1370
Interest expense	510	557	604
Earnings before tax	1525	290	766
Taxes (35%)	534	102	268
Net Income	991	189	498

Can someone help with this case please, and:

Fill in all the blanks spaces in the spreadsheet for the 2017 column and the 2017 %rev column

Balance the B/S

Answer all questions in full sentence format

Please put in the correct number for forecasted PP&E based on narrative (I highlighted the phrase in the narrative)

Show work for how you calculated the forecasted interest for 2017.

Thank you so much for all your help.

After the financial analysis based on 2016 preliminary estimates was completed, a number of changes were adopted to improve financial and business results for S&S Air during 2016. The customer that awarded the large 40 aircraft order agreed to make interim payments as finished aircraft were delivered (for a price concession). Revenue was revised up slightly due to updated marketing plans. Expenses were trimmed and controls were established that greatly reduced on hand inventory needs. A portion of the line of credit was converted to a 5 year, fixed rate loan. Cash on hand and general liquidity was forecasted to improve to acceptable levels by the end of the year.

Mark and Marie approached Chris about creating a forecast for 2017. They had learned the value of the financial analysis done for 2016 and wanted to get a look at any issues or problems that might be looming in the future. Of particular concern was the continuing need for external funds as the firm continued to grow. The general consensus of Mark and Marie was that S&S Air should realize an increase in revenue of 17% in 2017 from the 2016 results, based on anticipated demand of aircraft. It was felt expenses would change by the same percent of sales as incurred in 2016. However, it was estimated that annual depreciation in 2017 would increase 70% (to a total of $1,075,000), due to the substantial increase in assets that were going to be needed. Finally, Chris said that her banking contract indicted that interest expense should be about 8% of both notes payable and long term debt in 2017.

By the end of 2016, the firm would be operating at capacity; it was estimated that further growth in 2017 would require $6,500,000 (including all depreciation â that is, adding $6.5 million to the 2016 Net PP&E to derive PP&E for 2017) in plant upgrades and additions to meet anticipated production volume. Everyone felt that all other asset categories (including cash) and current liabilities (including the line of credit) would change by percent of revenue. Both owners were concerned about where any needed external financing would come from. Neither was interested in raising any further equity, and agreed that they would likely secure long term financing for any external funds needed. The plan was to pay dividends totaling $400,000 in 2017.

Chris knew that a key exhibit would be the forecast mode. She planned to set up the model so that a key input would be the sales growth forecast. The âplugâ to reconcile the balance sheet would be long term debt.

Q U E S T I O N S (please use full sentences)

1) Completed forecast model. Fill in all blanks for the 2017 and 2017 % of rev columns.

2) Compare PM, ROA, and ROE from 2016 to 2017. Why the differences?

3) Compare debt ratios from 2016 to 2017. Why the differences?

4) Compare total asset turnover from 2016 to 2017. Why the difference? What observations can you make regarding capacity utilization from 2016 to 2017?

5) Estimate the maximum revenue possible given the new level of assets in 2017, based on TATO in 2016 (at full capacity).

6) If COGS could be decreased by 1% of revenue, how much increase in EBIT would result? Express the change in EBIT in both dollar terms and % change.

7) Do a DuPont analysis on S&S Air for both 2016 and 2017. If the owners asked you for any issues or concerns about the basic results forecasted for 2017, what would you tell them? Consider operating, investing, and financing issues.

7a) Operating comments:

7b) Investing comments:

7c) Financing comments:

Income statement	2016	% rev			2017	% rev
Sales	$21,566,000	100.0%		17%%
COGS	14,786,000	68.6%	% of rev	68.6%
Other expenses	2,375,000	11.0%	% of rev	11.0%
Depreciation	625,000	2.9%	given	1,075,000
EBIT	3,780,000	17.5%	calc
Interest	437,000	2.0%	given	8.0%
Taxable income	3,343,000	15.5%	calc
Taxes (40%)	1,337,200	6.2%	calc TI * tax rate	40.0%
Net income	2,005,800	9.3%	calc
Dividends	375,000	1.7%	given	400,000
Add to RE	1,630,800	7.6%	calc

B A L A N C E S H E E T
	2016	% rev			2017	%
Current Assets
Cash	425,000	2.0%	% of rev	2.0%
Accounts rec.	855,000	4.0%	% of rev	4.0%
Inventory	689,000	3.2%	% of rev	3.2%
Total CA	1,969,000	9.1%	calc
Fixed assets
Net PP&E	9,873,000	45.8%	given	6,500,000
Total Assets	11,842,000	54.9%	calc

Current Liabilities
Accounts Payable	727,000	3.4%	% of rev	3.4%
Notes Payable	1,467,000	6.8%	% of rev	6.8%
Total CL	2,194,000	10.2%	calc
Long-term debt	2,908,800	13.5%	PLUG
TOTAL CL + LTL	5,102,800

Shareholder Equity
Common stock	120,000	0.6%	no change
Retained earnings	6,619,200	30.7%	+2017 RE
Total Equity	6,739,200	31.2%	calc

Total L&E	11,842,000	54.9%	calc

Ratio Analysis
	2016	2017
PM
ROA
ROE
Debt / Equity
Debt / Total Assets
Equity Multiplier
Total Asset TO

Thank you

FIN 300 Study Guide - Final Guide: Profit Margin, Net Present Value, Characters Of The Legend Of Zelda

Document Summary

Get access

Related Questions