BA350 Financial Management: Week 3 (Q12-3, Q12-5, P12-3, P12-5, P12-7)

BA350 Principles of Finance
Week 3 Assignment
- Questions 12-3, 12-5
- Problems 12-3, 12-5, 12-7

Q12-3 The following is sometimes used to forecast financial requirements:
AFN=(Ao*/So)(AS)-(Lo*/So)(AS)-MS1(1-POR)
What key assumption do we make when using this equation? Under what conditions might this assumption not hold true?

Q12-5 What is meant by the term “self supporting growth rate”? How is this rate related to the AFN equation, and how can that equation be used to calculate the self supporting growth rate?

P12-3 Refer to Problem 12-1. Return to the assumption that the company had $3million in assets at the end of 2010, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the upcoming year? Why is this AFN different from the one you found in Problem 12-1?

P12-5 At the year-end 2010, Bertin Inc’s total assets were $1.2 million and its account payable was $375,000. Sales, which in 2010 were $2.5 million, are expected to increase by 25% in 2011. Total assets and accounts payable are proportional to sales and that relationship will be maintained. Bertin typically uses no current liabilities other than the accounts payable. Common stock amounted to $425,000 in 2010, and retained earnings were $295,000. Bertin has arranged to sell $75,000 of new common stocks in 2011 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long term debt at the end of 2011. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 6% and 40% of earnings will be paid out as dividends.
a. What were Bertin’s total long term debt and total liabilities in 2010?
b. How much new longer debt financing will be needed in 2011? (Hint: AFN-New stock=New long term debt.)

P12-7 Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships thme to its chain of retail stores and has a staff to advise customers and help them set up their new computers. Upton’s balance sheet as of December 31, 2010 is shown here (millions of dollars):
Cash
$3.50
Accounts payable
$9.00
Receivables
$26.00
Notes Payable
$18.00
Inventories
$58
Accruals
$8.50
Total current assets
$87.50
Total current liabilities
$35.50
Net fixed assets
$35.00
Mortgage loan
$6.00
Common stock
$15.00
Total
$122.50
Retained earnings
$66.00
Total liabilities and equity
$122.50
Sales for 2010 were $350 million and net income for the year was $10.5 million, so the firm’s profit margin was 3.0%. Upton paid dividends of $4.2 million to common stock holders, so its payout ratio was 40%. Its tax rate is 40% and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin and the payout ratio remain constant in 2011.
If sales are projected to increase by $70 million, or 20% during 2011, use the AFN equation to determine Upton’s projected external capital requirements.
Using AFN equation, determineUpton’s self supporting growth rate. That is, what is the maximum growth ate the firm can achieve without having to employ non-spontaneous external funds?
Use the forecasted financial statement method to forecast Upton’s balance sheet for December 31, 2011. Assume that all additional external capital is raised as a bank loan at the end of the year and is reflected in notes payable (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton’s profit margin and dividend payout ratio will be the same in 2011 as they were in 2010. What is the amount of notes payable reported on 2011 forecasted balance sheet? (Hint: You don’t need to forecast the income statement because you were given the projected sales, profit margin, and dividends payout ratio; these figures allow you to calculate the 2011 addition to retained earnings for the balance sheet.)
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