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FM II Assignment 3 Solution

This document contains solutions to financial management assignment questions. It includes income statements, balance sheets, and calculations for a company from 2008 to 2009 showing growth. It also provides two practice problems calculating pro forma financial statements and determining the amount of new stock and debt needed for projected growth.

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67 views2 pages

FM II Assignment 3 Solution

This document contains solutions to financial management assignment questions. It includes income statements, balance sheets, and calculations for a company from 2008 to 2009 showing growth. It also provides two practice problems calculating pro forma financial statements and determining the amount of new stock and debt needed for projected growth.

Uploaded by

Sheryar Naeem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Lahore School of Economics

Financial Management II
Financial Planning and Forecasting – 1
Assignment 3 Solution
Examples
Q1) a. Part II. Income Statements 2008 Change 2009
Sales $3,600,000.0(1 + g) $3,960,000.0
Operating costs (includes depreciation) 3,279,720.00.875 3,465,000.0
Earnings before interest and taxes (EBIT) $ 320,280.0 $ 495,000.0
Less interest expense 20,280.0 See notes 37,125.0
Earnings before taxes (EBT) $ 300,000.0 $ 457,875.0
Taxes 120,000.0 EBT(T) 183,150.0
Net income (NI) $ 180,000.0 $ 274,725.0
Dividends $ 108,000.0 NI(Payout) $ 164,835.0
Addition to retained earnings $ 72,000.0 $ 109,890.0

Part III. Balance Sheets 2008 Change 2009


Assets
Cash $ 180,000.0 ( 1 + g) $ 198,000.0
Accounts receivable 360,000.0 0.1000 396,000.0
Inventories 720,000.0 0.2000 792,000.0
Fixed assets (grow with sales) 1,440,000.0(1 +g) 1,584,000.0
Total assets $2,700,000.0 $2,970,000.0

Liabilities and Equity


Payables + accruals (both grow with sales) $ 540,000.0 (1 + g) $ 594,000.0
Short-term bank loans 56,000.0 See notes 89,100.0
Total current liabilities $ 596,000.0 $ 683,100.0
Long-term bonds 100,000.0 See notes 207,900.0
Total debt $ 696,000.0 $ 891,000.0
Common stock 1,800,000.0See notes 1,765,110.0
Retained earnings 204,000.0 $109,890.0 313,890.0
Total common equity $2,004,000.0 $2,079,000.0
Total liabilities and equity $2,700,000.0 $2,970,000.0

Part V. Notes on Calculations


Assets in 2009 will change to this amount, from the balance sheet: $2,970,000.0
Target debt ratio 30.00%
Resulting total debt: (Target debt ratio)(2009 assets) $ 891,000.0
Less: Payables and accruals -594,000.0
Bank loans and bonds (= Interest-bearing debt) $ 297,000.0
Allocated to bank loans, based on 2008 proportion 30.00% 89,100.0
Allocated to bonds, based on 2008 proportion 70.00% $ 207,900.0
Interest expense: (Interest rate)(2009 Bank loans plus bonds) 37,125.0
Target equity ratio = 1 – Target debt ratio 70%
Required total equity: (2009 assets)(Target equity ratio) $2,079,000.0
Retained earnings, from 2009 balance sheet 313,890.0
Required common stock = Required total equity – Retained earnings $1,765,110.0

Old shares outstanding 100,000


Increase in common stock = 2009 Common stock – 2008 Common stock -$34,890.0
Initial price per share $45.00
Change in shares = Change in equity/Initial price per share -775.33
New shares outstanding = Old shares +  Shares 99,224.67
Old EPS = 2008 Net income/Old shares outstanding $1.80
New EPS = 2009 Net income/New shares outstanding $2.77
b. AFN= $2,700,000/$3,600,000(Sales) – ($360,000 + $180,000)/$3,600,000(Sales)
– (0.05)($3,600,000 + Sales)0.4
$0= 0.75(Sales) – 0.15(Sales) – 0.02(Sales) – $72,000
$0= 0.58(Sales) – $72,000
$72,000= 0.58(Sales)
Sales= $124,138.

Δ Sales $124,138
¿ ¿
Growth rate in sales = $3,600,000 $3,600,000

Problems for Assignment

Q1) Actual Forecast Basis Pro Forma


Sales $3,000  1.10 $3,300
Oper. costs excluding depreciation 2,450  0.80 Sales 2,640
EBITDA $ 550 $ 660
Depreciation 250  1.10 275
EBIT $ 300 $ 385
Interest 125 125
EBT $ 175 $ 260
Taxes (40%) 70 104
Net income $ 105 $ 156

Q2) a. Total deb t= Total liabilities and equity – Common stock – Retained earnings
= $1,200,000 – $425,000 – $295,000 = $480,000.

b. Assets/Sales (A0*/S0) = $1,200,000/$2,500,000 = 48%.

L0*/Sales (L0*/S0) = $375,000/$2,500,000 = 15%.

2013 Sales = (1.25)($2,500,000) = $3,125,000.

S = $3,125,000 – $2,500,000 = $625,000.

AFN = (A0*/S0)(S) – (L0*/S0)(S) – MS1(1 – Payout)


= (0.48)($625,000) – (0.15)($625,000) – (0.06)($3,125,000)(0.6)
= $300,000 – $93,750 – $112,500
= $93,750.

AFN = New Stock + New Long-Term Debt


93,750 = 75,000 + New Long-Term Debt
New Long-Term Debt = 93,750 – 75,000
= $18,750

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