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Financial Statement Stockholders Equityt document sample
Structure of Finance Learning Module Hints for Exam 1 & Quizzes 1-to-7 Prepared by Thad Jackson, GTA & Ph.D. student in Finance This document is not from Prof. Downs but instead is an optional resource kindly created by an ambitious GTA. Every effort has been made to make it error free. There may still be a few remaining errors. If you find one please notify your instructor or post it on the facebook group website. The document has 3 Parts. Part 1 Exam questions in order of appearance #1 Three verbal questions occupy slot #1 on the exam. See the eLearning self-tests and the textbook for details about the verbal exam questions. FF20 FF29 FF32 #2 FA14 Shareholders had a good year, earning a 25% annual rate of return. The P/E ratio today is 49.9 and the company just announced earnings per share of $4.10 . The company has a 90% payout ratio. How much did the stock price change over the past year? a. $55.59 b. $41.76 c. $37.97 d. $45.94 e. $50.53 Find Find dividend per share: Find #3 FA1 The Company had quite a few changes during the past year. The changes for their different balance sheet items from last year to this year were (the changes in parentheses are declines; otherwise the changes are increases): $5,500 for Receivables; ($4,200) for Payables; ($4,400) for Cash; $6,600 for Short-term Notes Payable; $4,100 for Plant, Property, & Equipment; and $5,100 for Long-Term Debt. Which statement is most accurate? a. The change in net working capital is ($1,300) and represents a source of financing b. The change in net working capital is ($1,700) and represents a use of financing c. The change in net working capital is ($1,500) and represents a use of financing d. The change in net working capital is ($1,500) and represents a source of financing e. The change in net working capital is ($1,700) and represents a source of financing Change in Current Assets: Receivables: 5,500 Cash (4,400) +1,100 Change in Current Liabilities: Payables: (4,200) Short-term Notes Payable: 6,600 2,400 An increase in liabilities is a source of financing. #4 FA3j The balance sheet for the Raider Company shows Total assets of $12,200 financed by $4,100 of Debt and $8,100 of Stockholders' equity. The Raider Company has 880 common shares outstanding, their equity price-to-book ratio is 3.60, and their price-to-earnings ratio is 38.2. For the Target Company Total assets of $9,100 are financed by $3,900 of Debt and $5,200 of Stockholders' equity. The Target Company has 900 common shares outstanding, their equity price-to-book ratio is 1.30, and their price-to- earnings ratio is 12.3. The Raider Company plans to takeover the Target Company. The Raider Company offers 5 share(s) of Raider stock to Target shareholders that tender 16 Target shares (the exchange ratio is 0.312500; assume fractional shares can be exchanged). Suppose tax effects and synergistic gains and losses equal zero; that is, accumulated sales, costs, and profits remain the same. After the Raider takes control of all Target shares, what is the market capitalization for the new conglomerated Company? a. $39,512 b. $43,463 c. $32,655 d. $35,920 e. $47,810 FA3f The balance sheet for the Raider Company shows Total assets of $12,400 financed by $6,200 of Debt and $6,200 of Stockholders' equity. For the Target Company Total assets of $4,400 are financed by $1,600 of Debt and $2,800 of Stockholders' equity. The Raider Company plans to takeover the Target Company. The Raider Company has 690 common shares outstanding, their equity price-to-book ratio is 6.20, and their price-to-earnings ratio is 30.3. The Target Company has 800 common shares outstanding, their equity price-to-book ratio is 0.60, and their price-to-earnings ratio is 14.6. The Raider Company offers 5 share(s) of Raider stock to Target shareholders that tender 104 Target shares (the exchange ratio is 0.048077; assume fractional shares can be exchanged). Suppose tax effects and synergistic gains and losses equal zero; that is, accumulated sales, costs, and profits remain the same. After the Raider takes control of all Target shares, what is the percentage change in Target shareholder wealth? a. 29% b. 24% c. 22% d. 32% e. 26% #6 FF5 FF25 FF31 #7 FA15c At year-end 2525 the company has Total assets of $6,800 financed by Debt of $3,200 and Stockholders' equity of $3,600 . For 210 common shares outstanding, the equity price-to-book ratio at year-end 2525 is 0.60. During 2526, the company expects an asset turnover ratio (= Salest / Total assetst-1 ) of 3.9 and an operating margin (= (Sales - operating expenses) / Sales ) of 8.5%. Interest charges will equal 9% of Debt. Corporate taxes equal 34% of taxable income and the payout ratio always is 60%. Your analyst tells you that at year-end 2526 the company price-to-earnings ratio will equal 1.8. What is the shareholders' rate of return for year 2526? a. 44.2% b. 48.6% c. 64.7% d. 53.5% e. 58.8% #8 BA6 The DuPont formula relates return on equity (= Net incomet / Stockholders equityt) to the company's net profit margin (= Net income / Sales), asset turnover (= Salest / Total assetst), and equity multiplier (= Total assets / Stockholders equity). This Company is in an industry where the average net profit margin is 7.55%, the debt-to-asset ratio (= Debt / Total assets) is 53.8%, and return on equity is 78.46%. The Company's financial statements for year 2525 show that year-end Total assets of $7,750 include Plant, property, & equipment (PP&E) of $5,400 . The assets are financed by Debt of $3,450 and Stockholders' equity of $4,300 . The annual Sales for 2525 equal $37,975 , total costs equal $35,050 , and Net income equals $2,925 . For the company relative to the industry, select the one statement most consistent with the DuPont analysis. a. the company's equity multiplier indicates the firm has an unusually large debt burden b. the company's profit margin indicates its revenues are unusually large relative to its costs c. the company's profit margin indicates its revenues are unusually small relative to its costs d. the company's equity multiplier indicates the firm has an unusually small debt burden e. the company's asset turnover indicates sales are unusually small relative to its assets Company Ratios: Industry Ratios: #9 3 FF9 FF10 FF22 #10 BE2a The most recent annual report lists company Sales revenue at $73,980 . Cost analysis suggests that annual Total fixed costs equal $25,500 and Total variable costs equal $45,450 . The company believes that the ratio of Sales revenue to Total variable costs is constant. Find the company's operating breakeven Sales revenue. a. $88,010 b. $66,123 c. $60,112 d. $80,009 e. $72,735 BE4b The company computes that each unit of production incurs variable operating costs of $33 and sells for $45 . The company's fixed costs are $34,000 per year. Find the annual Sales revenue at which the company attains a 14.9% operating margin [= (Sales revenue - total operating costs) / Sales] . a. $349,632 b. $384,595 c. $262,683 d. $288,952 e. $317,847 BE7b The most recent annual report lists company Sales revenue at $93,000 . Cost analysis suggests that annual Total fixed costs equal $34,200 and Total variable costs equal $45,675 . The annual Interest expense is $4,250 and there is no preferred stock. The company pays 25% of taxable income as taxes. The annual report also shows ROE, that is return on equity (=Net incomet / Stockholders' equityt), equals 12.1%. The company wants to increase its ROE to a target of 16.0%. They plan to hold constant Stockholders' equity, Total assets, Total fixed costs, Interest, and the ratio of Sales revenue to Total variable costs. Find the target Sales revenue and net profit margin (=Net income / Sales revenue) that provides the target ROE. a. Target Sales revenue equals $98,621 and the net profit margin is 7.8% b. Target Sales revenue equals $130,427 and the net profit margin is 8.9% c. Target Sales revenue equals $98,621 and the net profit margin is 8.9% d. Target Sales revenue equals $113,415 and the net profit margin is 8.9% e. Target Sales revenue equals $113,415 and the net profit margin is 7.8% #11 5 BE3 The most recent annual report lists company Sales revenue at $81,200 . Cost analysis suggests that annual Total fixed costs equal $34,000 and Total variable costs equal $40,400 . The company believes that the ratio of Sales revenue to Total variable costs is constant. Find the percentage decline in annual Sales revenue that would cause the company to fall to its operating breakeven point. a. -15.2% b. -18.3% c. -16.7% d. -13.8% e. -20.2% #12 5 BA9c The Company balance sheet for year-end 2525 shows that Total assets of $7,300 include Plant, property, & equipment (PP&E) of $4,000 . The assets are financed by Debt of $1,500 and Stockholders' equity of $5,800 (there are 500 shares outstanding). For year 2526 the company forecasts sales of $18,980 , a net profit margin (= net income / sales) of 8.8%, a dividend payout ratio (=dividends / net income) of 75%, and depreciation that is 19% of beginning-of-year PP&E. Throughout year 2526 Debt remains unchanged. The company expects to make capital expenditures such that for the year-end 2526 balance sheet PP&E is $500 larger than it is on the 2525 balance sheet above. Suppose the Capital expenditure is financed exclusively by issuing new equity at the stock price of year-end 2525. Also, suppose the equity price-to-book ratio is constant at 2.9 . Find the stockholder's annual rate of return for year 2526. a. 18.4% b. 22.2% c. 26.9% d. 20.2% e. 24.4% Before we can figure out the dividend per share we need to know how many shares we issue to finance the new PPE. The capital expenditure is financed by issuing new shares of stock. How many? #13 BA11a For year 2526 the company forecasts sales of $90,000 , an asset turnover ratio (= salest / total assetst-1 ) of 2.3,a net profit margin (= net income / sales) of 6.9%, a dividend payout ratio (=dividends / net income) of 70%, and a debt-to-equity ratio (= total debt / stockholders equity) of 102%. The company expects the equity price-to-book ratio of 0.85 to remain constant. Contrast for year 2526 the shareholder's book return-on-equity (= net incomet / stockholder's equityt-1 ) and market rate of return. a. the book return-on-equity is 32.1% whereas the market rate of return is 36.0% b. the book return-on-equity is 36.9% whereas the market rate of return is 31.3% c. the book return-on-equity is 32.1% whereas the market rate of return is 31.3% d. the book return-on-equity is 36.9% whereas the market rate of return is 36.0% e. the book return-on-equity is 27.9% whereas the market rate of return is 36.0% Use the Dupont Formula: Note: #14 5 BA12b At year-end 2525, Stockholder's Equity is $3,400 and there are 190 common shares outstanding. For 2526, sales should equal $10,200 , the net profit margin (= net income / sales) is 6.30%, the payout ratio (=dividends / net income) is 60%, and no shares are issued or repurchased. If the equity price-to-book ratio at year-end 2525 is 1.20, and it moves to 1.15 at year-end 2526, what is the shareholder's annual rate of return for 2526? a. 10.4% b. 9.4% c. 12.5% d. 13.8% e. 11.4% Find Find Find Dividend per share: #15 3 BS30 FF12, Whenever the price-to-book ratio is constant then which is the most accurate comparison of the return on equity (= Net incomet / Stockholders' equityt-1 ) with the stockholders' market rate of return (= (Sharepricet + Dividendt ) / Sharepricet-1 )? If the price to book ratio is bigger than one, the return on equity is bigger than the shareholder rate of return. If the price to book ratio always were to equal one, the return on equity always will equal the shareholder rate of return. If the shareholder rate of return is smaller than the return on equity then the price to book ratio is bigger than one. If the shareholder rate of return is bigger than the return on equity then the price to book ratio is smaller than one. TR38 TR42 #16 FA5 FA8 FA16 #17 EFN2b The Company's financial statements for year 2525 show that year-end Total assets of $3,045 include Plant, property, & equipment (PP&E) of $1,800 . The assets are financed by Current liabilities of $695 , Debt of $850 , and Stockholders' equity of $1,500 . The annual Sales equal $14,300 , total costs equal $14,000 , Net income equals $300 , Dividends equal $100 , and New retained earnings equal $200 . For 2526 the company plans 17.50% sales growth. They plan to hold constant the asset turnover (sales/total assets) and payout ratio (=dividends/net income). They plan to increase Current Liabilities spontaneously with sales, while holding Debt constant. Suppose the company decides to institute cost- cutting measures that should increase the net profit margin (=net income / sales) by 2.10% above its value of year 2525. Given the above plan, how much external financing is needed for year 2526? a. ($71) b. ($59) c. ($79) d. ($65) e. ($54) #18 EFN3a For year 2525 the company's sales were $600,000 and their annual-cost-of-goods-sold equaled 85% of sales. The company has followed a policy that set the average payment period (= Accounts Payables / daily-cost-of-goods-sold) at 48 days. The company realizes that relying on Payables as a financing source is free, whereas relying on Debt costs 19% per annum. Suppose they institute a policy that causes the average payment period to decrease by 25 days. Further, suppose the policy has no effect on the firm's Total Assets or Sales. Based on the numbers for year 2525, how much would the new policy affect annual financing costs due to the company's switch between high-cost Debt and low-cost (free) Payables? a. $8,031 b. $8,834 c. $7,301 d. $9,717 e. $6,637 #19 5 GR1 Find below the company's income statement. Income, 1/1 - 12/31/2525 Sales $17,900 - all costs $17,300 = Net income $600 - Dividends $380 = New retained earnings $220 Total assets at 12/31/2525 equal $3,975 and the debt-to-assets ratio is 70%. If the company is growing at their sustainable growth rate, what are Total assets at 12/31/2526? a. $3,662 b. $4,874 c. $4,431 d. $4,028 e. $3,329 GR4 Find below the company's income statement. Income, 1/1 - 12/31/2525 $17,900 = Sales $16,800 = Total costs $1,100 = Net income $760 = Dividends $340 = New retained earnings Total assets at 12/31/2525 equal $4,485 . If the company is growing at their internal growth rate, what are Total assets at 12/31/2526? a. $4,412 b. $5,872 c. $4,853 d. $6,459 e. $5,338 BA3a The Company balance sheet for year 2525 shows that Total assets of $3,600 are financed by Debt of $400 and Stockholders' equity of $3,200 . There are 400 shares outstanding at year-end 2525. The company plans to obtain venture capital by selling 100 additional shares at their current book value to a venture capitalist. The company agrees to repurchase the shares at year-end 2526 at a price equal to 130% of that year's book value. For year 2526 the company forecasts sales of $23,400 , a net profit margin (= net income / sales) of 9.00%, and a dividend payout ratio (= dividends / net income) of 45%. Assume debt remains unchanged. How much total cash flow (dividends plus repurchase price) does the venture capitalist receive at year-end 2526? a. $1,531 b. $1,391 c. $1,684 d. $1,265 e. $1,150 BA4a The Company balance sheet for year 2525 shows Total assets of $4,900 financed by Debt of $700 and Stockholders' equity of $4,200 . There are 530 shares outstanding at year-end 2525. The company plans to obtain venture capital by selling 210 additional shares at their current book value to a venture capitalist. The company agrees to repurchase the shares at year-end 2527 at a price equal to 144% of that year's book value. For year 2526 the company forecasts sales of $34,300 , a net profit margin (= net income / sales) of 10.70%, and a dividend payout ratio (= dividends / net income) of 35%. Assume debt remains unchanged. For year 2527, sales should be higher by 24% but the net profit margin and payout ratio should remain constant. Also, assume that debt remains unchanged. How much total cash flow (dividends plus repurchase price) does the venture capitalist receive at year-end 2527? a. $4,159 b. $4,575 c. $5,535 d. $6,089 e. $5,032 #20 5 GR2d The Company's financial statements for year 2525 show that year-end Total assets of $4,315 include Plant, property, & equipment (PP&E) of $4,000 . The assets are financed by Debt of $1,415 and Stockholders' equity of $2,900 . The annual Sales equal $19,400 , total costs equal $18,900 , Net income equals $500 , Dividends equal $180 , and New retained earnings equal $320 . For 2526 the asset turnover (sales/total assets), net profit margin (=net income / sales), payout ratio (=dividends/net income) and price-to-earnings ratio (now 24.0) will be constant. The number of shares outstanding is 150. The firm seeks maximum growth by relying exclusively on retained earnings; external financing will be zero. What is the equity price-to-book ratio at year-end 2526? a. 3.63 b. 3.99 c. 3.00 d. 2.73 e. 3.30 #21 5 GR3b The Company's financial statements for year 2525 show that year-end Total assets of $19,600 include Plant, property, & equipment (PP&E) of $16,000 . The assets are financed by Debt of $5,100 and Stockholders' equity of $14,500 . The annual Sales equal $94,100 , total costs equal $90,600 , Net income equals $3,500 , Dividends equal $1,960 , and New retained earnings equal $1,540 . For 2526 the asset turnover (sales/total assets), net profit margin (=net income / sales), and payout ratio (=dividends/net income) will be constant. The price-to-earnings ratio, 23.9 at year-end 2525, is expected to equal 31.1 at year-end 2526. The number of shares outstanding is 7250. The firm seeks maximum growth by relying on internal and external financing such that the debt-to-equity ratio remains constant. For the shareholder that buys a share at year-end 2525 and holds the stock through year-end 2526, what is the rate of return? a. 58.3% b. 43.8% c. 53.0% d. 48.2% e. 39.8% #22 BA13 On January 1, the company has Total assets of $8,600 financed by Debt of $4,700 and Stockholders' equity of $3,900 ; for 120 common shares outstanding, the equity price-to-book ratio is 0.77. During the subsequent year the company does not issue new shares. They also expect an asset turnover ratio (= Salest / Total assetst-1) of 2.7; a 4.80% net profit margin; and a 60% payout ratio. If the year-end equity price-to-book ratio were 0.83, what year-end shareprice is forecast? a. $33.07 b. $44.01 c. $30.06 d. $36.37 e. $40.01 BA14 At year-end 2525 the company has total assets of $7,500 financed by Debt of $3,300 and Stockholders' equity of $4,200 . For year 2526 the company forecasts an asset turnover ratio (= sales2526 / total assets2525) of 2.4, a net profit margin of 5.0%, and a dividend payout ratio of 50%. There are 110 shares outstanding and, at year-end 2525, the price-to-earnings ratio is 27.1. Throughout year 2526 no additional shares are issued, and the price-to-earnings ratio remains unchanged. Suppose that the net income is 7.1% larger in 2526 than in 2525. Find the shareholder annual rate of return for year 2526. a. 10.0% b. 9.1% c. 7.5% d. 8.3% e. 6.8% EFN1b Company sales equal $50,000 for the year ending December 31, the costs-of-goods sold (cgs) equal 80% of sales, and the inventory was replaced about every 66 days (inventory turnover in days = 365 / inventory turnover ratio; inventory turnover ratio = annual cgs / Inventory balance). The Company is considering a change in their inventory ordering policy. As a result, they believe that sales would remain constant in the forthcoming year, yet the length of time that inventory stays on the shelf would change by -34 days (shelf time decreases). If the financing rate for inventories is 19% per year, what is the effect on their annual inventory financing costs? a. The policy change results in additional annual costs of $708 b. The policy change results in additional annual savings of $708 c. The policy change results in additional annual costs of $616 d. The policy change results in additional annual savings of $616 e. The policy change results in additional annual savings of $814 CF2 Find below the Company's balance sheet at year-end 2525. Balance Sheet, 12/31/2525 $495 = Cash $2,000 = PP&E $2,495 = Total assets $895 = Debt $1,600 = Stockholders equity $2,495 = Total liabilities & equity For the year 2526, the following items are forecast: Depreciation is $220 ; Capital Expenditures equal $260 ; Interest expense is $50 ; Net Income is $300 ; Dividends equal $102 ; Cash Flow from Assets is ($85); Net Debt Issues is $45 (that is, debt increases). There is no preferred stock or extraordinary items, and there are no other non-cash expenses. The balance sheet for year-end 2526 contains only the same line items as appear above. For year 2526, how much is the cash flow to shareholders? a. ($82) b. ($99) c. ($74) d. ($68) e. ($90) #23 5 CF1c Find below the Company's balance sheet at year-end 2525. Total Assets: $4,335 Cash $435 PP&E $3,900 Total Liabilities & Equity $4,335 Debt $1,935 Stockholders equity $2,400 __________________ For the year 2526, the following items are forecast: Depreciation is $390 ; Capital Expenditures equal $330 ; Interest expense is $170 ; Net Income is $610 ; Dividends equal $146 ; Cash Flow from Assets is $433 ; Net Debt Issues is ($213) (that is, debt decreases). There is no preferred stock or extraordinary items, and there are no other non-cash expenses. The balance sheet for year-end 2526 contains only the same line items as appear above. For year-end 2526, how much is Stockholders Equity? a. $4,334 b. $3,940 c. $3,582 d. $2,960 e. $3,256 #24 5 CF3a The Company balance sheet for year-end 2525 lists the following assets: Cash, $525 Inventory, $690 PP&E, $2,600 Total, $3,815 and liabilities: Current liabilities, $1,045 Debt, $570 Stockholders equity, $2,200 Total, $3,815 For 2525 the Company's asset turnover ratio (Sales2525 / Total assets2525) is 5.0. Depreciation equals 13% of PP&E, and the gross profit margin (= Earnings Before Interest and Taxes / Sales) is 8.50%. Interest expense equals 8.60% of Long Term Debt. Taxes equal 33% of taxable income, and the payout ratio (= Dividends / Net income) is 65%. There are no other items on the income statement for 2525. There are 110 shares outstanding. As a prospective investor in the Company's shares, you are especially interested in their financial ratios. You know the price-to-earnings ratio at year-end 2525 equals 12.9. More significant to you, however, is the price-to-cash-flow ratio (= shareprice / operating cash flow per share). What is the company's price-to- cash-flow ratio? a. 10.4 b. 8.6 c. 11.4 d. 9.4 e. 12.6 Taxable income Type equation here. #25 BS17 Which statement about a venture capitalist is most accurate? venture financing typically goes to small or mid-sized companies with a lot of potential usually their plans involve liquidating their investment after 4 to 7 years more…. BS23 BS29 Part 2 Other hints for exam 1 questions BA9c The Company balance sheet for year-end 2525 shows that Total assets of $8,100 include Plant, property, & equipment (PP&E) of $6,300 . The assets are financed by Debt of $2,600 and Stockholders’ equity of $5,500 (there are 600 shares outstanding). For year 2526 the company forecasts sales of $31,590 , a net profit margin (= net income ÷ sales) of 4.4%, a dividend payout ratio (=dividends ÷ net income) of 55%, and depreciation that is 19% of beginning-of-year PP&E. Throughout year 2526 Debt remains unchanged. The company expects to make capital expenditures such that for the year-end 2526 balance sheet PP&E is $500 larger than it is on the 2525 balance sheet above. Suppose the Capital expenditure is financed exclusively by issuing new equity at the stock price of year-end 2525. Also, suppose the equity price-to-book ratio is constant at 2.0 . Find the stockholder’s annual rate of return for year 2526. a. 32.2% b. 29.2% c. 26.6% d. 38.9% e. 35.4% Step one: Find share price for 2525: Step Two: Find dividends per share: a) b) We issue new shares to finance new PP&E: c) CAPEX is financed with how many new shares? d) Step Three: Find share price 2526: a) b) Step Four: Solve for Rate of Return: BA11a For year 2526 the company forecasts sales of $85,000 , an asset turnover ratio (= sales t ÷ total assetst-1 ) of 2.1,a net profit margin (= net income ÷ sales) of 4.8%, a dividend payout ratio (=dividends ÷ net income) of 75%, and a debt-to-equity ratio (= total debt ÷ stockholders equity) of 90%. The company expects the equity price-to-book ratio of 0.70 to remain constant. Contrast for year 2526 the shareholder’s book return-on-equity (= net incomet ÷ stockholder’s equityt-1 ) and market rate of return. a. the book return-on-equity is 19.2% whereas the market rate of return is 25.3% b. the book return-on-equity is 14.5% whereas the market rate of return is 25.3% c. the book return-on-equity is 14.5% whereas the market rate of return is 29.1% d. the book return-on-equity is 16.7% whereas the market rate of return is 29.1% e. the book return-on-equity is 16.7% whereas the market rate of return is 25.3% Step 1: Find ROE by solving for shareholder’s equity: Step 2: plug in ROE to solve for Rate of return: BA12b At year-end 2525, Stockholder’s Equity is $4,600 and there are 250 common shares outstanding. For 2526, sales should equal $22,540 , the net profit margin (= net income ÷ sales) is 7.30%, the payout ratio (=dividends ÷ net income) is 35%, and no shares are issued or repurchased. If the equity price-to-book ratio at year-end 2525 is 0.80, and it moves to 0.85 at year-end 2526, what is the shareholder’s annual rate of return for 2526? a. 46.6% b. 35.0% c. 42.4% d. 38.5% e. 31.8% b. EFN2b Find below the Company’s financial statements for year 2525. Balance Sheet, 12/31/2525 Income, 1/1 – 12/31/2525 $570 Cash & securities $1,185 Current liabilities Sales $16,200 $705 Inventory $1,090 Debt total costs $16,000 $2,500 PP&E $1,500 Stockholders’ equity net income $200 $3,775 Total assets $3,775 dividends $120 new retained earnings $80 For 2526 the company plans 16.70% sales growth. They plan to hold constant the asset turnover (sales÷total assets) and payout ratio (=dividends÷net income). They plan to increase Current Liabilities spontaneously with sales, while holding Debt constant. Suppose the company decides to institute cost-cutting measures that should increase the net profit margin (=net income ÷ sales) by 2.10% above its value of year 2525. Given the above plan, how much external financing is needed for year 2526? a. $164 b. $218 c. $198 d. $180 e. $149 FN3a For year 2525 the company’s sales were $490,000 and their annual-cost-of-goods-sold equaled 85% of sales. The company has followed a policy that set the average payment period (= Accounts Payables ÷ daily-cost-of-goods-sold) at 40 days. The company realizes that relying on Payables as a financing source is free, whereas relying on Debt costs 15% per annum. Suppose they institute a policy that causes the average payment period to increase by 27 days. Further, suppose the policy has no effect on the firm’s Total Assets or Sales. Based on the numbers for year 2525, how much would the new policy affect annual financing costs due to the company’s switch between high-cost Debt and low-cost (free) Payables? a. ($3,472) b. ($3,819) c. ($3,157) d. ($4,201) e. ($4,621) 1) Solve for payables(non-stretch): 2) Solve for payables(stretch): 3) Solve for change in financing cost: GR4 Find below the company’s income statement. Income, 1/1 - 12/31/2525 Sales $12,800 Total costs $11,700 Net income $1,100 Dividends $610 New retained earnings $490 Total assets at 12/31/2525 equal $3,990 . If the company is growing at their internal growth rate, what are Total assets at 12/31/2526? a. $6,054 b. $6,660 c. $5,504 d. $5,003 e. $4,549 BA3a Find below the Company’s financial statements for year 2525. Balance Sheet, 12/31/2525 Income, 1/1 – 12/31/2525 $360 Current assets $1,060 Debt Sales $14,400 $3,000 PP&E $2,300 Stockholders’ equity total costs $13,800 $3,360 Total assets $3,360 net income $600 dividends $400 new retained earnings $200 For 2526 the asset turnover (sales÷total assets), net profit margin (=net income ÷ sales), payout ratio (=dividends÷net income) and price-to-earnings ratio (now 14.5) will be constant. The number of shares outstanding is 120. The firm seeks maximum growth by relying exclusively on retained earnings; external financing will be zero. What is the equity price-to-book ratio at year-end 2526? a. 3.04 b. 4.45 c. 3.35 d. 3.68 e. 4.05 GR3b Find below the Company’s financial statements for year 2525. Balance Sheet, 12/31/2525 Income, 1/1 – 12/31/2525 $5,850 Current assets $8,250 Debt Sales $125,500 $30,000 PP&E $27,600 Stockholders’ equity total costs $119,800 $35,850 Total assets $35,850 net income $5,700 dividends $3,820 new retained earnings $1,880 For 2526 the asset turnover (sales÷total assets), net profit margin (=net income ÷ sales), and payout ratio (=dividends÷net income) will be constant. The price-toearnings ratio, 17.5 at year-end 2525, is expected to equal 22.8 at year-end 2526. The number of shares outstanding is 13800. The firm seeks maximum growth by relying on internal and external financing such that the debt-to-equity ratio remains constant. For the shareholder that buys a share at year-end 2525 and holds the stock through yearend 2526, what is the rate of return? a. 48.4% b. 44.0% c. 58.6% d. 64.4% e. 53.3% BA14 At year-end 2525 the company has total assets of $6,700 financed by Debt of $3,400 and Stockholders’ equity of $3,300 . For year 2526 the company forecasts an asset turnover ratio (= sales2526 ÷ total assets2525) of 2.2, a net profit margin of 7.3%, and a dividend payout ratio of 35%. There are 230 shares outstanding and, at year-end 2525, the price-to-earnings ratio is 8.4. Throughout year 2526 no additional shares are issued, and the price-to-earnings ratio remains unchanged. Suppose that the net income is 6.0% larger in 2526 than in 2525. Find the shareholder annual rate of return for year 2526. a. 11.5% b. 13.9% c. 12.6% d. 9.5% e. 10.4% Part 3 Hints for questions that could be covered in labs BA3a The Company balance sheet for year 2525 shows that Total assets of $3,600 are financed by Debt of $400 and Stockholders' equity of $3,200 . There are 400 shares outstanding at year-end 2525. The company plans to obtain venture capital by selling 100 additional shares at their current book value to a venture capitalist. The company agrees to repurchase the shares at year-end 2526 at a price equal to 130% of that year's book value. For year 2526 the company forecasts sales of $23,400 , a net profit margin (= net income / sales) of 9.00%, and a dividend payout ratio (= dividends / net income) of 45%. Assume debt remains unchanged. How much total cash flow (dividends plus repurchase price) does the venture capitalist receive at year-end 2526? a. $1,531 b. $1,391 c. $1,684 d. $1,265 e. $1,150 20 5 GR2d The Company's financial statements for year 2525 show that year-end Total assets of $4,315 include Plant, property, & equipment (PP&E) of $4,000 . The assets are financed by Debt of $1,415 and Stockholders' equity of $2,900 . The annual Sales equal $19,400 , total costs equal $18,900 , Net income equals $500 , Dividends equal $180 , and New retained earnings equal $320 . For 2526 the asset turnover (sales/total assets), net profit margin (=net income / sales), payout ratio (=dividends/net income) and price-to-earnings ratio (now 24.0) will be constant. The number of shares outstanding is 150. The firm seeks maximum growth by relying exclusively on retained earnings; external financing will be zero. What is the equity price-to-book ratio at year-end 2526? a. 3.63 b. 3.99 c. 3.00 d. 2.73 e. 3.30 #21 5 GR3b The Company's financial statements for year 2525 show that year-end Total assets of $19,600 include Plant, property, & equipment (PP&E) of $16,000 . The assets are financed by Debt of $5,100 and Stockholders' equity of $14,500 . The annual Sales equal $94,100 , total costs equal $90,600 , Net income equals $3,500 , Dividends equal $1,960 , and New retained earnings equal $1,540 . For 2526 the asset turnover (sales/total assets), net profit margin (=net income / sales), and payout ratio (=dividends/net income) will be constant. The price-to-earnings ratio, 23.9 at year-end 2525, is expected to equal 31.1 at year-end 2526. The number of shares outstanding is 7250. The firm seeks maximum growth by relying on internal and external financing such that the debt-to-equity ratio remains constant. For the shareholder that buys a share at year-end 2525 and holds the stock through year-end 2526, what is the rate of return? a. 58.3% b. 43.8% c. 53.0% d. 48.2% e. 39.8% BA14 At year-end 2525 the company has total assets of $6,700 financed by Debt of $3,400 and Stockholders’ equity of $3,300 . For year 2526 the company forecasts an asset turnover ratio (= sales2526 ÷ total assets2525) of 2.2, a net profit margin of 7.3%, and a dividend payout ratio of 35%. There are 230 shares outstanding and, at year-end 2525, the price-to-earnings ratio is 8.4. Throughout year 2526 no additional shares are issued, and the price-to-earnings ratio remains unchanged. Suppose that the net income is 6.0% larger in 2526 than in 2525. Find the shareholder annual rate of return for year 2526. a. 11.5% b. 13.9% c. 12.6% d. 9.5% e. 10.4% 5 CF3a The Company balance sheet for year-end 2525 lists the following assets: Cash, $525 Inventory, $690 PP&E, $2,600 Total, $3,815 and liabilities: Current liabilities, $1,045 Debt, $570 Stockholders equity, $2,200 Total, $3,815 For 2525 the Company's asset turnover ratio (Sales2525 / Total assets2525) is 5.0. Depreciation equals 13% of PP&E, and the gross profit margin (= Earnings Before Interest and Taxes / Sales) is 8.50%. Interest expense equals 8.60% of Long Term Debt. Taxes equal 33% of taxable income, and the payout ratio (= Dividends / Net income) is 65%. There are no other items on the income statement for 2525. There are 110 shares outstanding. As a prospective investor in the Company's shares, you are especially interested in their financial ratios. You know the price-to-earnings ratio at year-end 2525 equals 12.9. More significant to you, however, is the price-to-cash-flow ratio (= shareprice / operating cash flow per share). What is the company's price-to- cash-flow ratio? a. 10.4 b. 8.6 c. 11.4 d. 9.4 e. 12.6