Sample Problems--Forecasting
1.
Jill's Wigs Inc. had the following balance sheet last year:
Cash
$ 800 Accounts payable
$ 350
Accts receivable
450 Accrued wages
150
Inventory
950 Notes payable
2,000
Net fixed assets
34,000 Mortgage
26,500
Common stock
3,200
Retained earnings
4,000
Total liabilities
Total assets
$36,200
and equity
$36,200
Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing after-tax net
income to $1,000. She feels that she can handle the increase without adding any fixed assets. (1)Will Jill need
any external financing if she pays no dividends? (2) If so, how much?
2.
You are given the following information:
Sales
$450
Costs
$400
Taxes (at 34%)
$ 17
Net income
$ 33
Dividend payout ratio
30%
If costs maintain a constant percentage of sales, what is the addition to retained earnings resulting from a 10% increase
in sales?
3.
You are the owner of a small business which has the following balance sheet last:
Current assets
$ 5,000 Accounts payable
$1,000
Net fixed assets
10,000 Accruals
1,000
Long-term debt
5,000
Common equity
8,000
Total liabilities
Total assets
$15,000
and equity
$15,000
Fixed and currents assets are fully utilized. All assets as well as accounts payables and accruals will increase at the
same rate as sales. Next year you expect sales to increase by 50 percent. You also expect to retain $2,000 of next
year's earnings within the firm. What is next year's additional external funding requirement, i.e., what is your firm's
EFN?
4.
Jill's Wigs, Inc. had the following balance sheet last:
Cash
$ 800 Accounts payable
Accounts receivable
450 Accrued wages
Inventory
950 Notes payable
Net fixed assets
34,000 Mortgage
Common stock
Retained earnings
Total liabilities
Total assets
$36,200
and equity
$ 350
150
2,000
26,500
3,200
4,000
$36,200
Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing after-tax net
income to $1,000. Jill's Wigs is currently operating at full capacity, so any increase in sales will have to be
accompanied by an equivalent percentage increase in fixed assets. (1)Will Jill need any external financing if she pays
no dividends? (2) If so, how much?
Use the following to answer questions 5 and 6:
AWOL Tours
Balance Sheet for Year Ending 2001
($ in millions)
2001
Cash
$ 20,000
Accounts payable
Accounts receivable
35,000
Notes payable
Inventory
60,000
Current liabilities
Current assets
115,000
Long-term debt
Fixed assets
275,000
Common stock
Retained earnings
Total assets
$390,000
Total liab.& equity
2001
$50,000
5,000
55,000
120,000
15,000
200,000
$390,000
AWOL Tours
2001 Income Statement
($ in millions)
Sales
Cost of goods sold
Earnings before interest and taxes
Interest paid
Taxable income
Taxes (35%)
Net income
Dividends (40%)
Addition to retained earnings
$700,000
560,000
140,000
17,000
123,000
43,050
$ 79,950
$31,980
$47,970
5. AWOL Tours sales for 2002 are projected to grow by 20 percent. Interest expense will be the same as in 2001
($17,000). The tax rate will remain at 35% and the dividend payout ratio will remain at 40%. Cost of goods sold, all
assets, and accounts payable increase are proportional to sales. If the firm is operating at full capacity, what is the external
financing needed to support this 20 percent growth in sales?
6. Refer to problem 5 above. Suppose that AWOL was operating at only 80 percent of capacity in 2001, what is EFN
now?
7. Use the following information for Rebel, Corp. to determine EFN. Rebel, Inc. has projected a 25 percent increase in
sales for the coming year. Assume that total costs will continue to run at 80% of sales, that the company will pay out 1/3
of its Net Income as dividends, and that the company is operating at full capacity. What is EFN for Rebel, Inc.?
Rebel, Inc.
Income Statement
Original
Sales
$1,000
Costs
800
EBT
200
Taxes (34%)
68
Net Income
132
Dividends
$44
Add. To RE
88
Cash
A/R
Inv
Total
NFA
Total
Rebel, Inc.
Balance Sheet
Original
$ 160
A/P
440
N/P
600
$ 1,200
LTD
1,800
C/S
R/E
$3,000
Total
Original
$ 300
100
800
800
1,000
$3,000
8.
Refer to problem 7 above. Now assume that Rebel, Inc. was operating at 90 percent capacity. What is
EFN in this case?
9.
Suppose a firm has net income of $100 and a profit margin equal to 14%. If the firm is working at 2/3 of
capacity. What are full capacity sales?
10. The most recent financial statements for 2 Doors Down, Inc. are shown below. Assets, costs, and current
liabilities are proportional to sales. Long-term debt and equity are not. 2 Doors Down pays out 50% of its net
income as dividends. Next year’s sales are projected to increase by 16%. What is the external financing
needed?
2 Doors Down, Inc.
Income Statement
Original
Sales
$3,100
Costs
2,600
EBT
500
Taxes (34%)
170
Net Income
330
Current assets
Fixed assets
Total
2 Doors Down Inc.
Balance Sheet
Original
$ 4,000
Current liabilities
3,000
Long-term debt
Equity
$7,000
Total
Original
$750
1,250
5,000
$7,000
11. Brown & Sons recently reported sales of $100 million, and net income equal to $5 million. The company has
$70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales.
Since the company is at full capacity, its assets must increase in proportion to sales. The company also
estimates that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company’s
sales increase its profit margin will remain at its current level. The company’s dividend payout ratio is 40%.
Based on the AFN formula, how much addition capital must the company raise in order to support the 20
percent in sales?
12. Chicky Pen Corporation recently reported the following income statement for last year: The company
forecasts that its sales will increase by 20 percent next year and its operating costs will increase in proportion
to sales. The company’s interest expense is expected to remain at $300 million and the tax rate will remain at
40%. The company plans to pay out 30 percent of its net income as dividends, the other 70 percent will be
added to retained earnings. What is the forecasted addition to retained earnings for next year?
Income Statement
Sales
Operating costs
EBIT
Interest
Earnings before taxes
Taxes (40%)
Net income available to common stockholders
$8,000
3,700
$4,300
300
$4,000
1,600
$2,400