Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 14, Problem 8SP
(Financial forecasting—discretionary financing needs) The most recent
Armadillo Dog Biscuit Co. Inc., ($ Millions)
The firm’s net profits were 6 percent of the current year’s sales but are expected to rise to 7 percent of next year’s sales. To help support its anticipated growth in asset needs next year, the firm has suspended plans to pay cash dividends to its stockholders. In past years a $1.50-per-share dividend has been paid annually. Armadillo’s accounts payable and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds needed to finance next year’s operations that are not forthcoming from other sources.
- a. Fill in the table and project the firm’s needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needs.
- b. Compare Armadillo’s current ratio (current assets/current liabilities) and debt ratio (total liabilities/total assets) before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of Armadillo’s financial condition?
- c. What difference, if any, would have resulted if Armadillo’s sales had risen to $6 million in 1 year and $7 million only after 2 years? Discuss only; no calculations are required.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
(Financial forecasting) Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has only been in business for one year, but its CFO predicts that the firm's operating
expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.
Last year Zapatera had $12.39 million in sales with net income of $1.22 million. The firm anticipates that next year's sales will reach $15.54 million with net income rising to $2.17 million. Given its present high
rate of growth, the firm retains all of its earnings to help defray the cost of new investments.
The firm's balance sheet for the year just ended is as follows:
Estimate Zapatera's total financing requirements (total assets) and its net funding requirements (discretionary financing needed) for 2014. Note: Use the percentage of sales given in Zapatera Enterprises'
balance sheet for 2013.
Hint: Make sure to round all intermediate calculations to at least five…
(Forecasting financing needs) Beason Manufacturing forecasts its sales next year to be $5.4 million and expects to earn 4.9 percent of that amount after taxes. The firm is currently in the process
of projecting its financing needs and has made the following assumptions (projections):
• Current assets are equal to 19.8 percent of sales, and fixed assets remain at their current level of $0.8 million.
• Common equity is currently $0.78 million, and the firm pays out half of its after-tax earnings in dividends.
The firm has short-term payables and trade credit that normally equal 11.8 percent of sales, and it has no long-term debt outstanding.
What are Beason's financing needs for the coming year?
Beason's expected net income for next year is $
(Round to the nearest dollar.)
(Forecasting financing needs) Beason Manufacturing forecasts its sales next year to be $5.6 million and expects to earn 4.3 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following
assumptions (projections):
• Current assets are equal to 19.3 percent of sales, and fixed assets remain at their current level of $1.1 million.
• Common equity is currently $0.75 million, and the firm pays out half of its after-tax earnings in dividends.
• The firm has short-term payables and trade credit that normally equal 12.1 percent of sales, and it has no long-term debt outstanding.
What are Beason's financing needs for the coming year?
Beason's expected net income for next year is $ 240,800 (Round to the nearest dollar.)
Beason's expected common equity balance for next year is $ 870400. (Round to the nearest dollar.)
Estimate Beason's financing needs by completing the pro forma balance sheet below: (Round to the nearest…
Chapter 14 Solutions
Foundations Of Finance
Ch. 14 - Prob. 1RQCh. 14 - Discuss the shortcomings of the percent of sales...Ch. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 1SPCh. 14 - Prob. 2SPCh. 14 - (Financial forecastingdiscretionary financing...Ch. 14 - (Financial forecastingpercent of sales) Next years...Ch. 14 - Prob. 5SPCh. 14 - (Percent of sales forecasting) Which of the...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Last year's sales - So Sales growth rate-g Last year's total assets - Ag* Last year's profit margin-PM Select the correct answer. O a $80.9 b.186.9 O c. $77.9 O d. $83.9 Oe. $92.9 $350 30% $390 5% Last year's accounts payable Last year's notes payable Last year's accruals Target payout ratio $40 $50 $30 60%arrow_forwardChachagogo, Inc. is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Last year's sales P200,000 Sales growth rate 40% Last year's current assets 65,000 Last year's noncurrent assets 70,000 Last year's profit margin 20.0% L last year's accounts payable P50,000 Last year's notes payable P25,000 Last year's accruals P20,000 Target plowback ratio 75.0% choices: -44,000 -50,000 -54,000 -16,000 -40,000 Jonson, Inc. is planning its operations for the coming year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the retention ratio from 90% that was used in the past to 50%, which the firm's investment bankers have recommended. Seventy-five percent of the total assets are considered…arrow_forwardHelparrow_forward
- Employees at JPGR Inc have been busy evaluating a potential new $9 million investment for their firm that would last 9 years. The operations and inventory managers believe that the firm would not need to invest now in net working capital (NWC), but expect that expenses will increase by $5.65 million per year, starting a year from now. The marketing team believes that sales will vary year to year, but equate to a $7.45 million annuity, starting a year from now. The investment assets will be depreciated to zero over the life of the project, but should yield scrap value of $550,000. The firm faces a 30% tax rate and the firm would require a return of 12.5% APR compounded annually on this project. (A) What is the NPV of the project? (B) Based on value reached in part (A), should the firm accept or reject the project?arrow_forwardEmployees at JPGR Inc have been busy evaluating a potential new $9 million investment for their firm that would last 9 years. The operations and inventory managers believe that the firm would not need to invest now in net working capital (NWC), but expect that expenses will increase by $5.65 million per year, starting a year from now. The marketing team believes that sales will vary year to year, but equate to a $7.45 million annuity, starting a year from now. The investment assets will be depreciated to zero over the life of the project, but should yield scrap value of $550,000. The firm faces a 30% tax rate and the firm would require a return of 12.5% APR compounded annually on this project. (A) What is the NPV of the project? (B) Based on value reached in part (A), should the firm accept or reject the project? (C) By what percent would projected sales have to rise or fall to reverse the above decision?arrow_forwardTowson Industries is considering an investment of $496,800 that is expected to generate returns of $150,000 per year for each of the next four years. What is the investment’s internal rate of return? https://openstax.org/books/principles-managerial-accounting/pages/time-value-of-money _________%arrow_forward
- Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $3 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz's interest rate is currently 10% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 11% of total sales, and the federal-plus- state tax rate is 40%. a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy Moderate…arrow_forwardRentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz's interest rate is currently 10% on both short- term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 13% of total sales, and the federal-plus-state tax rate is 40%. a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy Moderate…arrow_forwardRentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total $2 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz's interest rate is currently 8% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 10% of total sales, and the federal-plus-state tax rate is 40%. a. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy Moderate policy…arrow_forward
- (Financial forecasting-discretionary financing needs) Sambonoza Enterprises projects its sales next year to be $7 million and expects to eam 7 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections): 1. Current assets will equal 28 percent of sales, and fixed assets will remain at their current level of $1 million. 2. Common equity is currently $0.90 million, and the firm pays out half of its after-tax eamings in dividends 3. The firm has short-term payables and trade credit that normally equal 14 percent of sales, and it has no long-term debt outstanding. What are Sambonoza's financing requirements (ie., total assets) and discretionary financing needs (DFN) for the coming year? What are Sambonoza's financing requirements or total assets for the coming year? million. (Round to two decimal places.)arrow_forwardRentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $4 million as a result of an asset expansion presently being undertaken. Fixed assets total $1 million, and the firm plans to maintain a 55% debt-to - assets ratio. Rentz's interest rate is currently 10% on both short-term and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the federal-plus-state tax rate is 40%. What is the expected return on equity under each current assets level? Round your answers to two decimal places. Restricted policy % Moderate…arrow_forwardAfter analysing the financial data of Q-Constructions, you notice that they are trending in the right direction. A new 12-month construction proposal has come to the company worth $1,000,000 and an important question is whether it will be financially viable. They want you to analyse the proposal, in particular, the recommended cash flow schedule and to understand the key financial points during the construction project. The following cash flow schedule is summarised below. To ensure that all upfront and on-going outlay costs are covered in advance, Q-Constructions incur an initial start-up cost of $200,000. The proposal states that they will receive a deposit from the client of 10% of the total project price at the beginning. They then receive four equal instalment payments of 20% of the total project price associated to project milestones from the client at the end of the 2nd, 6th, 8th and 10th month. Finally, they receive the last 10% project milestone on lock-up which occurs at the…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License