Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th
Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th
14th Edition
ISBN: 9781305403895
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
Question
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Chapter 17, Problem 13P

a.

Summary Introduction

To prepare: The financial statement of M Incorporation for the year ended 2016.

Additional Funds Needed (AFN) Equation:

The AFN equation explains the amount of money that a company needs to fulfill the financial needs of the company. It gives the information related to the external financing, as the options available to a company to finance through external financing methods. This equation basically gives a new capital structure that includes an optimum mix of debt, preferred and common stock.

Financial Statement:

The financial statement is final accounts of the company. Financial statement of the company contains the income statement, statement of retained earnings, balance sheet and cash flow statement.

a.

Expert Solution
Check Mark

Explanation of Solution

Prepare Income statement,

Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th, Chapter 17, Problem 13P , additional homework tip  1

Table (1)

Prepare statement of retained earnings

Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th, Chapter 17, Problem 13P , additional homework tip  2

Table (2)

Prepare Balance sheet

Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th, Chapter 17, Problem 13P , additional homework tip  3

Table (3)

Working Notes:

Calculation of increase in sales:

Sales=$3,600,000+($3,600,000×10%)=$3,600,000+$360,000=$3,960,000

Calculation of operating cost including depreciation

Operatingcostsincludyingdepreciation=$3,960,000×87.5%=$3,465,000

Calculation of the dividend amount:

Dividend=Dividend per share×Number of outstanding shares=$1.08×100,000=$108,000

Calculation of dividend payout ratio:

Dividend payout ratio=DividendNet Income=108,000180,000=60%

Calculation of AFN equation:

AFN=[(($2,700,000$3,600,000)×$360,000)(($596,000$3,600,000)×$360,000)((0.05×$3,960,000)×(10.60))]=$270,000$59,600$79200=$131200

Calculation of the distribution of additional funds:

Additional Funds=Notes payable + Long term bonds=AFN(30%)+AFN(70%)=$131,200(30%)+$131,200(70%)=$39,360+$91,840=$131,200

Calculation of interest on bonds:

Interest on bonds=$20,280+($91,840×12.5%)+($39,360×12.5%)=$20,280+$11,480+$4,920=$36,680

Calculation of taxes:

Taxes=$463,240×40%=$185,296

Calculation of increase in cash:

Cash=$180,000+($180,000×10%)=$180,000+$18,000=$198,000

Calculation of increase in receivables:

Receivables=$360,000+($360,000×10%)=$360,000+$36,000=$396,000

Calculation of increase in inventories:

Inventories=$720,000+($720,000×10%)=$720,000+$72,000=$792,000

Calculation of increase in fixed assets:

Fixed assets=$1,440,000+($1,440,000×10%)=$1,440,000+$144,000=$1,584,000

Calculation of notes payable:

Notes payable =$56,000+$39360=$95,360

Calculation of total liability:

Total Liability=Total assets×30%=$2,970,000×30%=$891,000

Calculation of accrued liability:

Accrued liability=$180,000+Accrued Interest=$180,000+$114,80+$4,920=$196,400

Calculation of the amount of accounts payable:

Accounts payable=Total liabilities-Notes payable-Accrued liabilityBonds=$891,000$95,360$196,400$191,840=$407,400

Calculation of dividend of 2016:

Dividend=Net income×60%=$277,944×60%=$166,766.4

b.

Summary Introduction

To compute: The growth in sales using AFN equation.

Additional Funds Needed (AFN) Equation:

The AFN equation explains the amount of money that a company needs to fulfill the financial needs of the company. It gives the information related to the external financing, as the options available to a company to finance through external financing methods. This equation basically gives a new capital structure that includes an optimum mix of debt, preferred and common stock.

Financial Statement:

The financial statement is final accounts of the company. Financial statement of the company contains the income statement, statement of retained earnings, balance sheet and cash flow statement.

b.

Expert Solution
Check Mark

Explanation of Solution

Given:

Sales in 2015 is $3,600,000

Sales in 2016 is $3,960,000

Current liability at the end of 2015 is $596,000. It includes $360,000 of accounts payable, $56,000 of notes payable, and $180,000 of accrued liability

Forecasted Profit margin is 5%

Forecasted retention ratio is 60%.

The formula to calculate the additional funds is:

AFN=(ProjectedincreaseinassetsSpontaneousincreaseinliabilitiesIncreaseinretainedearnings)=(A0S0)×ΔS(L0S0)×ΔSMS1(1payout)

Where,

  • A0 is original assets.
  • S0 is current sales.
  • L0 is original liabilities.
  • ΔS is increase in sales.
  • MS1 is profit margin.

Substitute $2,700,000 for current assets, $3,600,000 for current sales, $3,960,000 for expected sales, assume growth rate of sales is g

AFN=[(($2,700,000$3,600,000)×g)(($596,000$3,600,000)×g)((0.05×$3,960,000)×(10.60))]0=0.75g0.165g$792000.585g=$79,200g=$79,2000.585g=$135,384.615

Conclusion

Thus, the growth in sales of M Incorporation is $135,384.615.

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