![Total liabilities and shareholders' equity
$
1,925
How would Executive Fruit’s financial model change if the
dividend payout ratio were cut to 1/3? Use the revised model to
generate a new financial plan for 2015 assuming that debt is the
balancing item. What would be the required external financing?
(Do not round intermediate calculations.)
Dividends fall by $ [removed]. Therefore, the requirement for
external financing falls from $ [removed]to $ [removed]. On the
other hand, shareholders' equity will be increased by $
[removed].
The right-hand side of the balance sheet becomes
(Do not round intermediate calculations. Enter your answers in
thousands.)
:](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-8-320.jpg)
![Long-term debt
$ [removed]
Shareholders' equity
[removed]
Total
$ [removed]
Chapter 18, Question 2- Find the sustainable and internal
growth rates for a firm with the following ratios: asset turnover
= 1.60; profit margin = 6%; payout ratio = 30%; equity/assets =
.50.
(Do not round intermediate calculations. Enter your answers as
a percent rounded to 2 decimal places.)
Sustainable growth rate
[removed]%
Internal growth rate
[removed]%
Chapter 18, Question 3-
Executive Fruit’s financial manager believes that sales in 2015
could rise by as much as 20% or by as little as 5%. Assets and
costs change in proportion to sales, debt remains constant, and
no new equity financing occurs.](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-9-320.jpg)
![a.
Recalculate the first-stage pro forma financial statements under
these two growth assumptions and calculate the required
external financing (All figures are in thousands).
(Enter your answers in thousands.)
Base Case
20% Growth
5% Growth
INCOME STATEMENT
Revenue
$
3,000
$ [removed]
$ [removed]
Cost of goods sold
2,700
[removed]
[removed]](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-10-320.jpg)
![EBIT
$
300
$ [removed]
$ [removed]
Interest
60
[removed]
[removed]
Earnings before taxes
$
240
$ [removed]
$ [removed]
State and federal tax
96
[removed]
[removed]](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-11-320.jpg)
![Net income
$
144
$ [removed]
$ [removed]
Dividends
96
[removed]
[removed]
Retained earnings
$
48
$ [removed]
$ [removed]
BALANCE SHEET](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-12-320.jpg)
![Assets
Net working capital
$
300
$ [removed]
$ [removed]
Fixed assets
1,200
[removed]
[removed]
Total assets
$
1,500
$ [removed]
$ [removed]](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-13-320.jpg)
![Liabilities and shareholders' equity
Long-term debt
$
600
$ [removed]
$ [removed]
Shareholders' equity
900
[removed]
[removed]
Total liabilities and shareholders' equity
$
1,500
$ [removed]
$ [removed]](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-14-320.jpg)
![Required external financing
$ [removed]
$ [removed]
b.
Assume any required external funds will be raised by issuing
long-term debt and that any surplus funds will be used to retire
such debt. Prepare the completed (second-stage) pro forma
balance sheet.
(Enter your answers in thousands.)
BALANCE SHEET
Base Case
20% Growth
5% Growth
Assets
Net working capital
$
300](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-15-320.jpg)
![$ [removed]
$ [removed]
Fixed assets
1,200
[removed]
[removed]
Total assets
$
1,500
$ [removed]
$ [removed]
Liabilities and shareholders' equity
Long-term debt
$
600
$ [removed]](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-16-320.jpg)
![$ [removed]
Shareholders' equity
900
[removed]
[removed]
Total liabilities and shareholders' equity
$
1,500
$ [removed]
$ [removed]
Chapter 18, Question 2- Plank’s Plants had net income of
$16,000 on sales of $60,000 last year. The firm paid a dividend
of $1,600. Total assets were $900,000, of which $450,000 was
financed by debt.](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-17-320.jpg)
![a.
What is the firm’s sustainable growth rate?
(Do not round intermediate calculations. Enter your answer as a
percent rounded to 1 decimal place.)
Sustainable growth rate
[removed]%
b.
If the firm grows at its sustainable growth rate, how much debt
will be issued next year?
(Do not round intermediate calculations.)
New debt
$ [removed]
c.
What would be the maximum possible growth rate if the firm
did not issue any debt next year?
(Do not round intermediate calculations. Enter your answer as a
percent rounded to 2 decimal places.)
Maximum growth rate
[removed]%](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-18-320.jpg)
![Chapter 18, Question 5- An all-equity-financed firm plans to
grow at an annual rate of at least 12%. Its return on equity is
20%. What is the maximum possible dividend payout rate the
firm can maintain without resorting to additional equity issues?
(Do not round intermediate calculations. Enter your answer as a
percent rounded to 1 decimal place.)
Maximum dividend payout ratio
[removed]%
Chapter 18, Question 6- The 2015 financial statements for
Growth Industries are presented below:
INCOME STATEMENT, 2015
Sales
$
280,000
Costs
190,000
EBIT
$
90,000
Interest expense](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-19-320.jpg)
![ratio of .50.
What is the required external financing over the next year?
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
$[removed]. The increase in net working capital will be
$[removed], which is less than the increase in the retained
earnings. Thus required external financing is $[removed]. 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.](https://image.slidesharecdn.com/chapter18question1-thefollowingisthefinancialstatemento-221120175306-26abd4e2/85/Chapter-18-Question-1-The-following-is-the-financial-statement-o-docx-23-320.jpg)
Chapter 18, Question 1- The following is the financial statement o.docx
- 1. Chapter 18, Question 1- The following is the financial statement of Executive Fruit Company for the year ended December 2014. INCOME STATEMENT, 2014 (Figures in $ Thousands) Revenue $ 3,500 Cost of goods sold 3,150 EBIT $ 350 Interest 70 Earnings before taxes $ 280 State and federal tax 112
- 2. Net income $ 168 Dividends 112 Additions to retained earnings $ 56 BALANCE SHEET (Year-End, 2014) (Figures in $ Thousands) Assets Net working capital $ 350 Fixed assets 1,400
- 3. Total assets $ 1,750 Liabilities and shareholders' equity Long-term debt $ 700 Shareholders' equity 1,050 Total liabilities and shareholders' equity $ 1,750 The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. First stage pro forma statements:
- 4. PRO FORMA INCOME STATEMENT, 2015 (Figures in $ Thousands) Revenue $ 3,850 Cost of goods sold 3,465 EBIT $ 385 Interest 70 Earnings before taxes $ 315 State and federal tax 126 Net income
- 5. $ 189 Dividends 126 Additions to retained earnings $ 63 PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands) Assets Net working capital $ 385 Fixed assets 1,540 Total assets $
- 6. 1,925 Liabilities and shareholders' equity Long-term debt $ 700 Shareholders' equity 1,113 Total liabilities and shareholders' equity $ 1,813 Required external financing $ 112 Second stage pro forma balance sheet:
- 7. PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands) Assets Net working capital $ 385 Fixed assets 1,540 Total assets $ 1,925 Liabilities and shareholders' equity Long-term debt $ 812 Shareholders' equity 1,113
- 8. Total liabilities and shareholders' equity $ 1,925 How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.) Dividends fall by $ [removed]. Therefore, the requirement for external financing falls from $ [removed]to $ [removed]. On the other hand, shareholders' equity will be increased by $ [removed]. The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.) :
- 9. Long-term debt $ [removed] Shareholders' equity [removed] Total $ [removed] Chapter 18, Question 2- Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.60; profit margin = 6%; payout ratio = 30%; equity/assets = .50. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Sustainable growth rate [removed]% Internal growth rate [removed]% Chapter 18, Question 3- Executive Fruit’s financial manager believes that sales in 2015 could rise by as much as 20% or by as little as 5%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs.
- 10. a. Recalculate the first-stage pro forma financial statements under these two growth assumptions and calculate the required external financing (All figures are in thousands). (Enter your answers in thousands.) Base Case 20% Growth 5% Growth INCOME STATEMENT Revenue $ 3,000 $ [removed] $ [removed] Cost of goods sold 2,700 [removed] [removed]
- 11. EBIT $ 300 $ [removed] $ [removed] Interest 60 [removed] [removed] Earnings before taxes $ 240 $ [removed] $ [removed] State and federal tax 96 [removed] [removed]
- 12. Net income $ 144 $ [removed] $ [removed] Dividends 96 [removed] [removed] Retained earnings $ 48 $ [removed] $ [removed] BALANCE SHEET
- 13. Assets Net working capital $ 300 $ [removed] $ [removed] Fixed assets 1,200 [removed] [removed] Total assets $ 1,500 $ [removed] $ [removed]
- 14. Liabilities and shareholders' equity Long-term debt $ 600 $ [removed] $ [removed] Shareholders' equity 900 [removed] [removed] Total liabilities and shareholders' equity $ 1,500 $ [removed] $ [removed]
- 15. Required external financing $ [removed] $ [removed] b. Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet. (Enter your answers in thousands.) BALANCE SHEET Base Case 20% Growth 5% Growth Assets Net working capital $ 300
- 16. $ [removed] $ [removed] Fixed assets 1,200 [removed] [removed] Total assets $ 1,500 $ [removed] $ [removed] Liabilities and shareholders' equity Long-term debt $ 600 $ [removed]
- 17. $ [removed] Shareholders' equity 900 [removed] [removed] Total liabilities and shareholders' equity $ 1,500 $ [removed] $ [removed] Chapter 18, Question 2- Plank’s Plants had net income of $16,000 on sales of $60,000 last year. The firm paid a dividend of $1,600. Total assets were $900,000, of which $450,000 was financed by debt.
- 18. a. What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Sustainable growth rate [removed]% b. If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.) New debt $ [removed] c. What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Maximum growth rate [removed]%
- 19. Chapter 18, Question 5- An all-equity-financed firm plans to grow at an annual rate of at least 12%. Its return on equity is 20%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Maximum dividend payout ratio [removed]% Chapter 18, Question 6- The 2015 financial statements for Growth Industries are presented below: INCOME STATEMENT, 2015 Sales $ 280,000 Costs 190,000 EBIT $ 90,000 Interest expense
- 20. 18,000 Taxable income $ 72,000 Taxes (at 35%) 25,200 Net income $ 46,800 Dividends $ 23,400 Addition to retained earnings 23,400 BALANCE SHEET, YEAR-END, 2015 Assets
- 21. Liabilities Current assets Current liabilities Cash $ 4,000 Accounts payable $ 11,000 Accounts receivable 9,000 Total current liabilities $ 11,000 Inventories 37,000 Long-term debt 180,000 Total current assets
- 22. $ 50,000 Stockholders’ equity Net plant and equipment 220,000 Common stock plus additional paid-in capital 15,000 Retained earnings 64,000 Total assets $ 270,000 Total liabilities and stockholders’ equity $ 270,000 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
- 23. ratio of .50. What is the required external financing over the next year? 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 $[removed]. The increase in net working capital will be $[removed], which is less than the increase in the retained earnings. Thus required external financing is $[removed]. 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.