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Financial Management: Theory and Practice

Eugene F. Brigham, Michael C. Ehrhardt

Chapter 14

Financial Planning and Forecasting Financial Statements - all with Video Answers

Educators

Chapter Questions

01:03

Problem 1

Baxter Video l'ruducts' sales are expected to increase frum $\$ 5$ million in 2007 to $\$ 6$ million in 2008 or by $20 \%$. Its assets totaled $\$ 3$ million at the end of 2007 . Baxter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2007 , current liabilities were $\$ 1$ million, consisting of $\$ 250,000$ of accounts payable, $\$ 500,000$ of notes payable, and $\$ 250,000$ of accruals. The after-tax profit margin is forecasted to be $5 \%$, and the forecasted payout ratio is $70 \% .$ Use the AFN formula to forecast Baxter's additional funds needed for the coming year.

Nick Johnson
Nick Johnson
Numerade Educator
05:22

Problem 2

What would be the additional funds needed if the company's year-end 2007 assets had been $\$ 4$ million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem $14-1 ?$ Is the company's "capital intensity" the same or different?

Vikash Ranjan
Vikash Ranjan
Numerade Educator
01:42

Problem 3

Return to the assumption that the company had $\$ 3$ million in assets at the end of $2007,$ but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem $14-1 ?$

Dale Sanford
Dale Sanford
Numerade Educator
02:49

Problem 4

Bannister Legal Services generated $\$ 2.0$ million in sales during 2007 , and its year end total assets were $\$ 1.5$ million. Also, at year-end 2007 , current liabilities were $\$ 500,000,$ consisting of $\$ 200,000$ of notes payable, $\$ 200,000$ of accounts payable, and $\$ 100,000$ of accruals. Looking ahead to $2008,$ the company estimates that its assets must increase by 75 cents for every $\$ 1$ increase in sales. Bannister's profit margin is $5 \%$, and its payout ratio is $60 \%$. How large a sales increase can the company achieve without having to raise funds externally?

Niamat Khuda
Niamat Khuda
Numerade Educator
01:56

Problem 5

At year-end 2007 , total assets for Bertin Inc. were $\$ 1.2$ million and accounts payable were $\$ 375,000 .$ Sales, which in 2007 were $\$ 2.5$ million, are expected to increase by $25 \%$ in $2008 .$ Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Bertin typically uses no current liabilities other than accounts payable. Common stock amounted to $\$ 425,000$ in 2007 , and retained earnings were $\$ 295,000 .$ Bertin plans to sell new common stock in the amount of $\$ 75,000$. The firm's profit margin on sales is $6 \% ; 40 \%$ of earnings will be paid out as dividends.
a. What was Bertin's total debt in $2007 ?$
b. How much new, long-term debt financing will be needed in $2008 ?$ (Hint:AFN - New stock $=$ New long-term debt.) Do not consider any financing feedback effects.

Nick Johnson
Nick Johnson
Numerade Educator
05:28

Problem 6

Buoth's fixed assets were used to only $50^{\circ}$, uf capacity during 2007 , but its current assets were at their proper levels. All assets except fixed assets increase at the sume rate as sules, and fixed assets would also increase at the same rate if the current excess capacity did nut exist. Buoth's after-tax profit margin is forecasted to be $5 \%,$ and its payout ratio will be $60 \%$. What is Booth's additional funds needed (AFN) for the coming year?

Puneet Prajapati
Puneet Prajapati
Numerade Educator
03:03

Problem 7

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Upton's balance sheet as of December 31,2007 , is shown here (millions of dollars).Sales for 2007 were $\$ 350$ million, while net income for the year was $\$ 10.5$ million. Upton paid dividends of $\$ 4.2$ million to common stockholders. The firm is operating at full capacity. Assume that all ratios remain constant.a. If sales are projected to increase by $\$ 70$ million, or $20 \%$, during 2008 , use the AFN equation to determine Upton's projected external capital requirements.b. Construct Upton's pro forma balance sheet for December 31,2008 . Assume that all external capital requirements are met by bank loans and are reflected in notes payable. Assume Upton's profit margin and dividend payout ratio remain constant.

Victor Salazar
Victor Salazar
Numerade Educator
02:11

Problem 8

Stevens Textile's 2007 financial statements are shown below.Suppuse 2008 sales are projected to increase by $15 \%$ uver 2007 salcs. Determine the additional funds needed. Assume that the company was operating at full capacity in $2007,$ that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Use the forecasted financial statements method to develop a pro forma balance sheet and income statement for December 31,2008 . Use an interest rate of $10 \%$ on the balance of debt at the beginning of the year to compute interest (cash pays no interest). Use the pro forma income statement to determine the addition to retained earnings.

Nick Johnson
Nick Johnson
Numerade Educator
04:10

Problem 9

Garlington Technologies Inc.'s 2007 financial statements are shown below.Suppose that in 2008 sales increase by $10 \%$ over 2007 sales and that 2008 dividends will increase to $\$ 112,000$. Construct the pro forma financial statements using the percent of sales method. Assume the firm operated at full capacity in 2007 . Use an interest rate of $13 \%$ on the debt balance at the beginning of the year. Assume that the AFN will be in the form of notes payable.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:00

Problem 10

Start with the partial model in the file $F M 12$ Ch 14 P10 Build a Model.xls from the textbook's Web site. Cumberland Industries' financial planners must forecast the company's financial results for the coming year. The forecast will be based on the furecasted financial statements method, and any additional funds needed will be cotained by using a mix of nutes payable, lony-term debt, and common stock. No preferred stuck will be issued. Data for the problem, including Cumberland Industries' balance sheet and income statement, can be fund in the spreadsheet problem fur (hapter $3 .$ Use these data to answer the following questions.a. Cumberland Industries has had the following sales since 2002 . Assuming the historical trend continues, what will sales be in $2008 ?$$$\begin{array}{lc}\text { Year } & \text { Sales } \\\hline 2002 & \$ 129,215,000 \\2003 & 180,901,000 \\2004 & 235,252,000 \\2005 & 294,065,000 \\2006 & 396,692,000 \\2007 &455,150,000\end{array}$$.Base your forecast on a spreadsheet regression analysis of the $2002-2007$ sales. By what percentage are sales predicted to increase in 2008 over $2007 ?$ Is the sales growth rate increasing or decreasing?
b. Cumberland's management believes that the firm will actually experience a $20 \%$ increase in sales during $2008 .$ Construct the 2008 pro forma financial statements. Cumberland will not issue any new stock or long-term bonds. Assume Cumberland will carry forward its current amounts of short-term investments and notes payable, prior to calculating additional funds needed (AFN). Assume that any AFN will be raised as notes payable (if AFN is negative, Cumberland will purchase additional short-term investments). Use an interest rate of $9 \%$ for short-term debt (and for the interest income on shortterm investments) and a rate of $11 \%$ for long-term debt. No interest is earned on cash. Use the beginning-of-year debt balances to calculate net interest expense. Assume dividends grow at an $8 \%$ rate. c. Now create a graph that shows the sensitivity of AFN to the sales growth rate. To make this graph, compare the AFN at sales growth rates of $5 \%, 10 \%, 15 \%$ $20 \%, 25 \%,$ and $30 \%$
d. Calculate net operating working capital (NOWC), total operating capital, NOPAT, and operating cash flow (OCF) for 2007 and 2008 . Also, calculate the free cash flow (FCF) for 2008e. Suppose Cumberland can reduce its inventory-to-sales ratio to $5 \%$ and its cost-to-sales ratio to $83 \% .$ What happens to AFN and FCF?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator