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FNBU 3221 Chapter 2: Chapter 2

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carminebear339
5 Feb 2017
School
Fordham University
Department
Finance
Course
FNBU 3221
Professor
Gary Frey

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Document Summary

Balance sheet: financial statement showing a firm"s accounting value on a particular date. Assets classified as current/fixed: fixed has relatively long life & can be tangible/intangible, current life of less than 1 year. Liabilities classified as current/long-term: current life of less than 1 year, long-term debt not due in coming year. Net working capital: current assets less current liabilities. Financial leverage use of debt in firm"s capital structure: more debt firm has (as percentage of assets), greater degree of financial leverage. Market value more important than book value for financial managers. Income statement: financial statement summarizing firm"s performance over period of time. Income statement may not be representative of actual cash inflows & outflows that occur during particular period b/c of gaap recognition & matching principles. Noncash items: expenses charged against revenues that don"t directly affect cash flow, such as depreciation. Average tax rate: total taxes paid divided by total taxable income.

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Related Questions

The 2015 financial statements for Growth Industries are presented below:
INCOME STATEMENT, 2015
Sales $ 370,000
Costs 235,000
EBIT $ 135,000
Interest expense 27,000
Taxable income $ 108,000
Taxes (at 35%) 37,800
Net income $ 70,200
Dividends $ 42,120
Addition to retained earnings 28,080
BALANCE SHEET, YEAR-END, 2015
Assets Liabilities
Current assets Current liabilities
Cash $ 6,000 Accounts payable $ 13,000
Accounts receivable 11,000 Total current liabilities $ 13,000
Inventories 33,000 Long-term debt 270,000
Total current assets $ 50,000 Stockholders’ equity
Net plant and equipment 310,000 Common stock plus additional paid-in capital 15,000
Retained earnings 62,000
Total assets $ 360,000 Total liabilities and stockholders’ equity $ 360,000

Sales and costs in 2016 are projected to be 20% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60.

What is the required external financing over the next year?

Even if sales increase by 20%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.

The 2015 financial statements for Growth Industries are presented below:

INCOME STATEMENT, 2015

Sales

$

250,000

Costs

175,000

EBIT

$

75,000

Interest expense

15,000

Taxable income

$

60,000

Taxes (at 35%)

21,000

Net income

$

39,000

Dividends

$ 23,400

Addition to retained earnings

15,600

BALANCE SHEET, YEAR-END, 2015

Assets

Liabilities

Current assets

Current liabilities

Cash

$

8,000

Accounts payable

$

15,000

Accounts receivable

13,000

Total current liabilities

$

15,000

Inventories

29,000

Long-term debt

150,000

Total current assets

$

50,000

Stockholders’ equity

Net plant and equipment

190,000

Common stock plus additional paid-in capital

15,000

Retained earnings

60,000

Total assets

$

240,000

Total liabilities and stockholders’ equity

$

240,000

Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60.

What is the required external financing over the next year?

Answer:

Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $_______ . The increase in net working capital will be $________ , which is less than the increase in the retained earnings. Thus required external financing is $________ . A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.

The 2015 financial statements for Growth Industries are presented below:

INCOME STATEMENT, 2015
Sales $ 330,000
Costs 215,000
EBIT $ 115,000
Interest expense 23,000
Taxable income $ 92,000
Taxes (at 35%) 32,200
Net income $ 59,800
Dividends $ 35,880
Addition to retained earnings 23,920


BALANCE SHEET, YEAR-END, 2015

Assets Liabilities
Current assets Current liabilities
Cash $ 9,000 Accounts payable $ 16,000
Accounts receivable 14,000 Total current liabilities $ 16,000
Inventories 37,000 Long-term debt 230,000
Total current assets $ 60,000 Stockholders’ equity
Net plant and equipment 270,000 Common stock plus additional paid-in capital 15,000
Retained earnings 69,000
Total assets $ 330,000 Total liabilities and stockholders’ equity $ 330,000

Sales and costs in 2016 are projected to be 30% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60.

What is the required external financing over the next year?

Even if sales increase by 30%, the firm still has more than enough fixed assets to meet production. Only working capital will increase.

Net working capital of the firm in 2015 was $____

The increase in net working capital will be $____, which is less than the increase in the retained earnings.

Thus required external financing is $_____

A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.