Erin Thompson
Discussion Questions
1. External financing depends on payout ratio, capital intensity ratio, profit margin, days
sales outstanding, and sales growth rate according to the AFN equation.
3. I would not agree with this statement because the use of computerized planning models
is increasing currently. This is due to the fact that the computerized models provide a lot
of useful information.
5. Policy Changes
a. +
b. -. The firm needs less manufacturing facilities, raw materials, and work in
process.
c. +. It reduces spontaneous funds; however, it may eventually increase retained
earnings.
d. +
e. +
f. +. This should stimulate sales, so it may be offset in part by increased profits.
g. 0
h. +
Problems
1. AFN = Projected Increase in Assets – Spontaneous Increase in Liabilities – Increase in
Retained Earnings
= (300,000/500,000)1,000,000 – (500,000/5,000,000)1,000,000 – 0.05(6,000,000)(10.70)
= (0.60)(1,000,000) – (.10)(1,000,000) – (300,000)(.30)
= 600,000 – 100,000 – 90,000
= $410,000
4. a. Net Income 2016 = Sales – Operating Cost – Int Expense – Taxes
EBIT = (1.2*700) – 612.50 – 40 = 222.50
Net Income = 222.50 – (222.50*.40) = $133.50
b. Dividend Payout Ratio = (32/96) = 33.33%
Current Dividend = 33.33%*133.50 = $44.50
Growth in Dividend = (44.50-32)/32 = 39.02%
5. a. 5.0 billion/0.90 = $5,555,555,555.56
b. Fixed Assets/Sales = 1.7/5.0 = 0.34
c. Sales Increase = 5.0 billion (1+0.12) = $5.6 billion
5.6 billion*0.34 = 1.904 billion
Increase = 1.904 – 1.7 = .204 or 204M increase in fixed assets
Erin Thompson
9. Increase in Assets = Increase in Spontaneous Liabilities + Increase in Retained Earnings
Spontaneous Liabilities = 200,000 +100,000 = 300,000
Proportion of Spontaneous Liabilities = 300,000/2,000,000 = .15
Retained Earnings = .40*0.05 = 2%
= .75( x-2,000,000) = 300,000/2,000,000*( x – 2,000,000) + .02
= 0.58x = 1,200,000
= 2,068,965.52
10. Year End Balance of Receivable
Sales = 320*(1+.12) = 358.40
Receivables = 9.25+0.07(358.40) = 34.34
Year End DSO
DSO = Receivables/(Sales/365) = 34.97
11. Sales Forecast = Sales+ (Sales*Percentage of Increase in Sales)
= 110,000,000 + (110,000,000*.05)
= 110,000,000 + 5,500,000
= $115,500,000
Inventories = $9 + 0.0875(Sales)
= 9 + 0.0875(115,500,000)
= $19,106,250