Final Chapter 10
New RE
= Old RE + Sales × Net Margin × ( 1 − Payout Ratio )
Jaunty Coffee Co. had sales of $70 million and expenses of $50 million, and they paid 40% in taxes. It has equity of $42 million. The board approved dividends totaling $4,500,000. What is the company's sustainable growth rate? .1429 .1786 .1667 .6015
Answer: .1786 Net income = 70 million - 50 million = 20 million * (1-.40) = 12 million net income ROE = 12 million / 42 million = .2857 Dividend payout ratio = 4.5 million / 12 million = .375 SGR = .2857 ( 1 - .375) = .1786
Freedom Rock Bicycles earned $25 million after tax in the last year. The company has $100 million in assets and $85 million in equity. It has a policy of paying 12% of earnings as dividends. What is the SGR of Freedom Rock? .1285 .2200 .0353 .2588
Answer: .2588 ROE 25 million / 85 million = .2941 SGR = .2941 (1 - .12) = .2588
What is the sustained growth rate given the following? Sales are 2.5 million Total expenses (including cost of goods sold through taxes) are 2.0 million Total assets are 3.0 million Equity is 1.3 million Dividend payout ratio is .25 .7500 .3846 .2885 .2552
Answer: .2885 ROE = NI / equity 2.5 - 2.0 = .5 in income divided by 1.3 in equity for .3846 1 - dividend payout ratio is 1 - .25 = .75 .3846 * .75 = .2885
Management of Hind Sight Solutions has revamped its operations. Looking forward to future growth, their new goal is to pay 8 percent of net income as dividends, reaching a net margin of 6 percent. Last year's information is as follows: sales $5,000,000; Inventory $3,500; total assets $4,500,000; total liabilities $3,000,000. Calculate their sustainable growth rate rounded to the nearest percent. (Hint: You will need to use the DuPont equation to solve this one.) 23% 22% 18% 32% 45%
Answer: 18% NM 6% Payout ratio 8% Sales 5,000,000 Assets 4,500,000 Liabilities 3,000,000 Asset Turnover = 5,000,000/4,500,000 = 1.1% Equity Multiplier = 4,500,000/(4,500,000-3,000,000) = 3 SGR = .06 * 1.11 * 3 * (1-.08) = 18%
Whole Pine Inc. forecasts sales of $450 million. It has established the following percentages of spontaneous accounts: 5% of cash, 17% of A/R, 11% of inventory, 48% of PP&E, and 18% of A/P. It holds a mortgage of $30 million, bonds of $50 million, equity of $150 million, and earnings of $35 million. What is the DFN? 15.5 million 33 million 18.5 million -16.5 million
Answer: 18.5 million Assets Liabilities & Equity Cash 22.5 million Accts Payable 81.0 million Acct. Rec 76.5 million Mortgage 30.0 million Inventory 49.5 million Bonds 50.0 million PP & E 216.0 million Equity 150.0 million Earnings 35.0 million Total Assets 364.5 Million Total Liab & Equity 346.0 million DFN 364.5 - 346.0 = 18.5 million
iven the following information, what is the sustainable growth rate for this company? Net income $2,000,000.00, Sales $20,000,000.00, Assets $4,000,000.00, Dividends $1,000,000.00, Equity $3,000,000.00, Liabilities: $1,000,000.00 22% 42% 29% 35% 33%
Answer: 33% NI 2,000,000 Equity 3,000,000 Dividends 1,000,000 Payout ratio = 1,000,000/2,000,000 = .5 ROE = 2,000,000/3,000,000 = .667 SGR = .667 * .5 = 33.33%
You perform an analysis and determine the net profit margin (NI/S) is 8%, the total asset turnover (S/A) is 5, and the equity multiplier (A/E) = 1. If the firm pays no dividends because it is a high-growth start-up, what is the SGR? 40% 5% 0% 8% 20%
Answer: 40% NI/S 8.0% S/A 5 A/E 1 SGR 40.0%
If sales are $1,000,000, then what are the total current assets given the following? Cash 25% of sales Accounts receivable 13% of sales Accounts payable 10% of sales Accrued payroll 5% of sales Cost of goods sold 50% of sales Inventory 15% of cost of goods sold
Answer: 455,000 Cash 250,000 + A/R 130,000 + Inventory (.15 * COST OF GOODS SOLD of 500,000) = 250 + 130 + 75 = 455
What is the increase in retained earnings given the following? Sales are $10 million Net earnings pre-tax are $1 million Dividend payout ratio is .12 Tax rate is 40% 400,000 528,000 880,000 726,000
Answer: 528,000 1,000,000 - 400,000 in taxes = 600,000 .12 * 600,000 = 72,000 600,000 - 72,000 = 528,000 Increase in retained earnings does not need beg RE or end RE, since it is only the increase between the years.
GetStrong, Inc has net income of $10 million, equity on the balance sheet of $100 million, and pays an aggregate dividend of $3 million. Compute GetStrong's sustainable growth rate (SGR). 3.0% 5.0% 7.0% 10.0% Not enough information.
Answer: 7.0% NI 10 E 100 Div 3
Paradigm Toys forecasts sales of 750,000. Their financial department has developed the following forecast percentages based on historical averages: Cash 11%, A/R 8%, 13% for inventory and accounts payable of 14%. Property Plant and Equipment is 210,000. The company has long term debt of 120,000 and equity of 85,000. It estimates profits at 55,000. What is the DFN? 85,000 30,000 25,000 110,000
Answer: 85,000 Assets Liabilities & Equity Cash 82,500 A/P 105,000 A/R 60,000 Long Term Debt 120,000 Inventory 97,500 Equity 85,000 PP & E 210,000 Profits 55,000 Total Assets 450,000 Total Liab & Equity 365,000 DFN 450,000-365,000 = 85,000
FarFromGrooving, Inc. has just been invited to bid on the contract of their dreams. Last year FarFromGrooving had a net margin of 1.96 percent, plowback ratio of 75 percent, ROA of 6.52 percent, and ROE of 11.9 percent. Using this information, calculate the company's SGR to the nearest percent. 8% 9% 10% 11% 12% None of the above
Answer: 9% ROE 11.90% Plowback 75% SGR = .119 * .75 = .08925
Which of the following is NOT a non-spontaneous (discretionary) account? Notes payable Long-term financing Common stock Accounts payable All of these choices are non-spontaneous
Answer: Accounts payable
How do we compute projected RE? Projected RE = Old RE + Change in RE Projected RE = Old RE + NI-Dividends Projected RE = Old RE + Projected sales x net margin x (1-payout ratio) All of these choices None of these choices
Answer: All of these choices
Which of the following are real methods to manage sales growth? Raise prices Decrease/eliminate dividend payments Reduce costs through economies of scale None of these choices All of these choices
Answer: All of these choices
which of the following can be a discretionary account? Notes Payable PP&E Long-term debt Common Stock All of these choices None of these choices
Answer: All of these choices
Spontaneous accounts generally include Accounts payable Accounts receivable Cash Inventory All of these choices None of these choices
Answer: All of these choices Found in the following section(s) of the text:
Which of the following is NOT a way discussed to manage sales growth? Slow sales growth Examine capacity constraints Lower dividend payout Increase net margin All of these choices are ways
Answer: All of these choices are ways
he amount of product or service a firm can produce with its given fixed assets is known as: Economies of scope Catabolism Capacity Economies of scale Capability
Answer: Capacity Found in the following section(s) of the text:
How do we compute DFN? DFN = Projected total assets + projected total liabilities + projected owners' equity DFN = Projected total assets - projected total liabilities - projected owners' equity DFN = Projected total assets + projected total liabilities - projected owners' equity None of the above DFN = Projected total assets - projected total liabilities + projected owners' equity
Answer: DFN = Projected total assets - projected total liabilities - projected owners' equity
A positive DFN indicates: The project will pay more than the company's required return External financing is needed Excess internal financing is available Internal financing is sufficient Financing needs are equal to financing available
Answer: External financing is needed
Retained Earnings is a spontaneous account.
Answer: False
When using the percent of sales method, accounts like accounts receivable always have to vary with sales. (t/f)
Answer: False As seen in the example from the text, managers may choose to forecast some accounts based on their discretion - even if those accounts would typically be forecasted as a percent of sales. This may be because managers have better information about the strategy and changes the firm plans to implement.
If your firm is operating at full capacity, in the real world, an increase in sales will increase fixed assets incrementally as sales increase. (t/f)
Answer: False Fixed assets are lumpy. If we exceed 100% capacity, fixed assets will require a discretionary investment in additional production capacity and will not increase incrementally with sales.
Forecasting is vulnerable to the inputs that we put into the model. What is the acronym for this concern? EVA SGA FCF GIGO EFN
Answer: GIGO Found in the following section(s) of the text:
Which of the following questions are NOT estimated by financial forecasting? How much have we made in the past? How much will we need to finance a project? How much DFN is needed? How much will our sales be in the future? All of these choices are estimated by financial forecasting
Answer: How much have we made in the past? Historical financial statements show how much we have made in the past - this does not need to be forecasted.
rowth typically requires increased ________ in the firm (for forecasting purposes). Efficiency Investment Leverage Risk Strategy
Answer: Investment
the company's asset accounts increase which of the following needs to happen? Liability or equity accounts must increase by the same amount The company must change their current collection standards to keep up with demand All asset accounts cannot increase at the same time The company's net income must increase also
Answer: Liability or equity accounts must increase by the same amount The balance sheet must balance, so if assets go up, then the sum of liabilities and equity must go up as well.
Which of the following is usually NOT a spontaneous account? Current assets Accounts payable Accruals Long-term debt All of these choices are spontaneous
Answer: Long-term debt
When we talk about discretionary accounts, who's discretion is being exercised? Creditors Management Shareholders Forecasters Equity holders
Answer: Management Found in the following section(s) of the text:
ow do we compute future levels of spontaneous accounts? Divide projected level of sales by historical percent of sales. Multiply projected level of sales by historical percent of sales. Add projected level of sales to historical percent of sales. Subtract historical percent of sales from level of sales. None of these choices.
Answer: Multiply projected level of sales by historical percent of sales.
Sometimes we multiply "net margin" times projected sales to get forecasted net income. What is the ratio for net margin? S/NI E/NI NI/S NI/E NI/RE
Answer: NI/S NI/S = Net income/sales
Projected Retained Earnings is most correctly calculated by: Projected sales x net margin x payout ratio Old RE + projected NI (Old RE/Old sales) * projected sales Change in RE + Dividends Old RE + Change in RE
Answer: Old RE + Change in RE
What is the first step in the percent of sales process? Grow the firm Choose spontaneous accounts Project future sales Calculate DFN Compute retained earnings
Answer: Project future sales The steps are: Project sales revenues and expenses Forecast change in spontaneous balance sheet accounts Deal with discretionary accounts Calculate retained earnings (RE) Determine total financing need/assets Calculate DFN
ollowing accounts EXCEPT: Discretionary accounts Spontaneous accounts PP&E accounts All of these choices are forecasted at management's discretion
Answer: Spontaneous accounts With the percent of sales forecast, spontaneous accounts are forecasted based on historical ratios and growth of sales. Discretionary accounts are based on management's choices and PP&E accounts are often at the discretion of the manager's based on the industry and the firm's needs. As discussed in the video, in specific, strategic managerial decisions, management can choose to explicitly change AR and AP. However, as discussed in the text, these two accounts are almost always allowed to vary directly with sales, and are therefore, considered spontaneous.
What is DFN? The difference between the forecasted asset accounts and the combination of the liability and equity accounts The total funding needed to support the growth of a firm The amount of funding needed from retained earnings The excess after all investment has been made The amount of dividends paid out after financing needs are satisfied
Answer: The difference between the forecasted asset accounts and the combination of the liability and equity accounts
Capacity constraints are usually examined carefully when DFN is too high. (t/f)
Answer: True
Management can dictate how spontaneous accounts should change. (t/f)
Answer: True The text gives the example of management setting a goal for average collection period (ACP). Using the ACP ratio, management dictates what accounts receivable (AR) will be forecasted as. So instead of AR being spontaneous as it is typically, this is an example of how management can dictate how it will change.
Firms can always find ways to finance their growth. (t/f)
False
The dividend payout ratio is the reciprocal of the plowback ratio.
False