Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Chapter 6, Problem 12P
Colter Steel has
Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are
If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.
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First National Bank is doing some scenario analysis. It believes that its source of funds (the Federal Reserve) will soon increase the cost of loans. In fact, the cost of making loans is expected to change from the current 2 percent interest to either 3 percent or 4 percent interest in the next year. There will be no change in its $2,000,000 income at the 2 percent interest level, but net income will fall to $1,000,000 if interest rates increase to 3 percent and decrease to $100,000 if the interest rates increase to 4 percent . Finally, National predicts a 10 percent probability of a decrease to 2 percent interest rate, a 50 percent probability of a 3 percent interest rate, and a 40 percent probability of an increase to 4 percent interest rate.
(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.)
Chapter 6 Solutions
Foundations of Financial Management
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