Class 3, chapter 4, in class exercises for BB PDF

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Download Class 3, chapter 4, in class exercises for BB PDF

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FIN 300, F -14 CLASS -3 Chapter 4 DR. SIRAJUM M SARWAR In class-exercises

1. DEF Inc is operating at 70% of fixed asset capacity. Current Sales are $500,000. By how much can sales increase before the company must add to its fixed assets? When the company is running at: therefore,

70%, the sale is 500,000 1%, the sale is 500,000 x 0.01 / 0.7 100%, the sale is 500,000 x 1 / 0.7 = 714,285.70

The diff = 100% - 70% = 714,285.70 – 500,000 = 214,285.70 2. You have been told that a company had sales of $20,000 last year. The company's costs were $16,000 last year. The company's tax rate is 30%. The company paid a dividend of $1,120 last year. The company had assets of $50,000. It had debt of $20,000 and total equity of $30,000. Assets and costs are proportional to sales (therefore, assets and costs increase at the same rate as sales). The company's dividend payout ratio will not change next year. Next year's sales are projected to be $30,000. If debt does not change next year, and no new shares are issued by the firm, what is the amount of the external financing needed? Sales = 20,000, 30,000 g = (30,000 – 20,000)/20,000 = 0.5 = 50% sales = 30,000 COGS = 24,000 [16,000 x 1.5] EBIT = 6000 (–) Tax = 30% = 1800 NI = 4200 Div = 4200 x 0.4 = 1680 RE = 4200 x 0.6 = 2520

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123 Inc has a profit margin of 15%. Its total asset turnover ratio is 2 and its dividend payout ratio is 60%. What is the company’s internal growth rate? Internal growth rate = ROA x R / 1 – (ROA X R) = (0.3 x 0.4) / 1 – (0.3 x 0.4) = 13.64%

Working: ROA = PM x TAT = 0.15 x 2 = 0.3 RR = 1 – DPR = 1 – 0.6 = 0.4

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456 Inc has a profit margin of 12%. It has a capital intensity ratio of 0.80 and its debt/equity ratio is 2. The company's net income was $100,000 and company paid a dividend of $70,000. What is the sustainable growth rate? What is the company's internal growth rate? SGR = ROE x R / 1 – (ROE x R) = 0.45 x 0.3 / 1 – (0.45 – 0.3) = 15.61%

ROE = PM x TAT x EM

PM = 12%

=0.12 x (1/0.8) x 3

CIR = TA/Sales = 0.8

=0.45

D/E = 2

IGR = ROA x R / 1 – (ROA x R) = 0.15 x 0.3 / 1 – (0.15 x 0.3) = 0.045 / 0.955 = 4.712%

NI = 100,000 Div = 70,000 DPR = 70,000/100,000 = 70% RE = (1 – DPR) = 30%

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