Problems chap5-part1 PDF

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PROBLEMS CHAPTER 5 – PART1. Consider the following simplified financial statements for the PhillipsCorporation (assuming no income taxes):Income Statement Balance Sheet Sales $23,000 Assets $15,800 Debt $ 5, Costs 16,700 Equity 10, Net income $ 6,300 Total $15,800 Total $15,Phillips has predicted a ...

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PROBLEMS CHAPTER 5 – PART1 1.

Consider the following simplified financial statements for the Phillips Corporation (assuming no income taxes): Income Statement Sales Costs Net income

Balance Sheet

$23,000 16,700

Assets

$15,800

$ 6,300

Total

$15,800

Debt Equity

$ 5,200 10,600

Total

$15,800

Phillips has predicted a sales increase of 15 percent. It has predicted that every item on the balance sheet will increase by 15 percent as well. Create the pro forma statements and reconcile them. What is the plug variable here?

Sales Costs Net income

2.

$26,450 Assets $19,205 $7,245 Total

$18,170 Debt Equity $18,170 Total

$5,980 $12,190 $18,170

Net income is equal to $7,245 and equity increase by only $1,590 Dividend = 7,245 – 1,590 = $5,655 Dividends are the plug variable. In the previous question, assume Phillips pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma statements and determine the external financing needed.

Sales Costs Net income

$26,450 Assets $19,205 $7,245 Total

$18,170 Debt Equity $18,170 Total

$3,948 $14,223 $18,170

Retained earning = 7,245*50% = 3,622.5 EFN = increase in assets – addition to retained earnings = 2,370 - 3,622.5 = -1,252.5 3. The most recent financial statements for Zoso, Inc., are shown here (assuming no income taxes): Income Statement Sales Costs Net income

Balance Sheet

$6,300 3,890

Assets

$18,300

$2,410

Total

$18,300

Debt Equity Total

$12,400 5,900 $18,300

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $7,434. What is the external financing needed? Increase in Sales = 18%

Sales Costs Net

4.

$7,434 Assets $4,590 $12,024 Total

$21,594 Debt Equity $21,594 Total

$14,632 $6,962 $21,594

EFN=Increase in Assets−Increase in Liabilities−Increase in Retained Earnings Increase in Assets = 1,134 + 2,232 The most recent financial statements for GPS, Inc., are shown here: Income Statement Sales

$19,500

Costs Taxable income

15,000 $ 4,500

Balance Sheet Assets Total

$98,000

Debt

$98,000

Equity Total

$52,500 45,500 $98,000

Taxes (40%) Net income

1,800 $ 2,700

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,400 was paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected to be $21,840. What is the external financing needed? Sale increase = 12%

Sales Costs Taxable Taxes Net income

$21,840 Assets $16,800 $5,040 Total $2,016 $3,024

$109,760 Debt Equity $109,760 Total

$58,800 $50,960 $109,760

Dividends = ($1,400 / $2,700)*3,024 = $1,568 Addition to retained earnings = $3,024 − 1,568 = $1,456 Equity = $45,500 + 1,456 = $46,956 EFN = Total assets − Total liabilities and equity = $109,760 − 99,456 = $10,304...