# FIN515 Homework6

```FIN515– Managerial Finance - 61767
Professor Juan Roman
Student: Alejandra Humpierres
Week 6 – Homework
Chapter 12 Problems (p. 533)

12-1 AFN Equation
Broussard Skateboard’s sales are expected to increase by 15% from \$8 million in 2016 to \$9.2
million in 2017. Its assets totaled \$5 million at the end of 2016.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales.
At the end of 2016, current liabilities were \$1.4 million, consisting of \$450,000 of accounts
payable, \$500,000 of notes payable, and \$450,000 of accruals. The after-tax profit margin is
forecasted to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast
Broussard’s additional funds needed for the coming year.
Ao = current level of assets
\$5,000,000.00
Lo = current level of liabilities
\$900,000
Current Liabilities - notes payable
ΔS = change in sales
\$1,200,000
So = beginning sales level
\$8,000,000
S1 = new level of sales
\$9,200,000
PM = profit margin
6.0%
b = retention rate = 1 – payout rate
60%
Payout rate
40%

12-2 AFN Equation
Refer to Problem 12-1. What would be the additional funds needed if the company’s year-end 2016
assets had been \$7 million? Assume that all other numbers, including sales, are the same as in Problem
12-1 and that the company is operating at full capacity. Why is this AFN different from the one you
found in Problem 12-1? Is the company’s “capital intensity” ratio the same or different?
Ao = current level of assets
\$7,000,000.00
\$900,000
Lo = current level of liabilities
ΔS = change in sales
\$1,200,000
So = beginning sales level
\$8,000,000
S1 = new level of sales
\$9,200,000
PM = profit margin
6.0%
60%
b = retention rate = 1 – payout rate
Payout rate
40%
\$583,800.00
The capital intensity Ratio will be different also, as this is total assets/sales, increasing assets.
12-3 AFN Equation
Refer to Problem 12-1. Return to the assumption that the company had \$5 million in assets at the end
of 2016, 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 12-1?
\$5,000,000.00
Ao = current level of assets
Lo = current level of liabilities
\$900,000
ΔS = change in sales
\$1,200,000
So = beginning sales level
\$8,000,000
S1 = new level of sales
\$9,200,000
PM = profit margin
6.0%
b = retention rate = 1 – payout rate
100%
Payout rate
0%
\$63,000.00
Because the payout rate is 0% as you did not pay dividends

12-7 Forecasted Statements and Ratios
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located
warehouses, ships them 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, 2016, is shown here (millions of
dollars):
Sales for 2016 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 stockholders, so its payout ratio was
40%. Its tax rate was 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 2017.
a. If sales are projected to increase by \$70 million, or 20%, during 2017, use the AFN equation to
determine Upton’s projected external capital requirements.
\$122.50
Ao = current level of assets
Lo = current level of liabilities
\$17.50
ΔS = change in sales
\$70
So = beginning sales level
\$350
S1 = new level of sales
\$420
PM = profit margin
3.00%
b = retention rate = 1 – payout rate
60%
Payout rate
40%
b. Using the AFN equation, determine Upton’s self-supporting growth rate. That is, what is the
maximum growth rate the firm can achieve without having to employ nonspontaneous external
funds?
Self-supporting Growth Rate
Ao = current level of assets
\$122.50
\$17.50
Lo = current level of liabilities
ΔS = change in sales
\$70
So = beginning sales level
\$350
S1 = new level of sales
\$420
PM = profit margin
3.00%
b = retention rate = 1 – payout rate
60%
Payout rate
40%
Self-supporting Growth Rate 6.38%
c. Use the forecasted financial statement method to forecast Upton’s balance sheet for December
31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the
year and is reflected (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 2017 as they were in 2016. What is the amount of the line of
credit reported on the 2017 forecasted balance sheets? (Hint: You don’t need to forecast the
income statements because the line of credit is taken out on the last day of the year and you are
given the projected sales, profit margin, and dividend payout ratio; these figures allow you to
calculate the 2017 addition to retained earnings for the balance sheet without actually
constructing a full income statement.)
LOC= \$13.44 million
Chapter 13 Questions (pp. 561)

13-2 Agency conflict
What is the possible agency conflict between inside owner/managers and outside shareholders?
The main conflict between owner/managers and outside shareholders is conflict of interest. The first
ones will most likely operate the company to maximize their on welfare. This welfare obviously includes
the increased wealth due to increasing the value of the company, but it also includes perquisites (or
“perks”) such as more leisure time, luxurious offices, executive assistants, expense accounts, limousines,
corporate jets, and generous retirement plans. The issue is that if the owner/manager sells some stocks
to outsiders the cost of those perks now are spreads to the outsiders, maybe increasing the
consumption of those perks by the owner/managers as it become less expensive for them.

13-3 Agency Conflict - Borrowers and Lenders
What are some possible agency conflicts between borrowers and lenders?
The investment decisions a borrower makes after the loan has been originated, these decisions might be
harmful to the lender. If the borrower invests in high risk projects. If the project pays off big, most of the
benefits accrue to the borrowers, and the creditors just get the principal back, it doesn’t benefit them at
all. If the project fails the borrower doesn't get anything, and most likely will ask for more debt, to which
lenders protect themselves by charging higher interest rates.
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