In: Finance
Current Income Statement Current Balance Sheet
Net sales $6,500 Cash $ 900 Accounts payable $1,020
Less: Cost of goods sold 4,922 Accounts rec. 620 Long-term debt 4,360
Less: Depreciation 570 Inventory 2,850 Common stock 2,400
Earnings before interest and taxes 1,008 Total $4,370 Retained earnings 1,190
Less: Interest paid 300 Net fixed assets 4,600
Taxable Income $ 708 Total assets $8,970 Total liab. & equity $8,970
Less: Taxes 248
Net income $ 460
Dividends $184 Add to RE =
________ 6. What is the retention or plowback ratio for this company?
________ 7. Assume that the firm is operating at 85 percent of capacity. What is the full-capacity level of
sales?
WE WILL NOT COVER THIS IS THE FALL 2014 CLASS
________ 8. Assume the firm has a constant dividend payout ratio and a projected sales increase of 10 percent. All
costs, assets, and current liabilities vary directly with sales. What is the external financing need?
________ 9. What is the Equity Multiplier?
________ 10. Assume the firm has a constant dividend payout ratio and a constant debt-equity ratio. What is the fastest the company can grow assuming they do not want any external financing?
6) Plowback ratio or retention ratio shows how much earnings are retained after giving out dividends.
Plowback ratio = (Net Income - Dividends) / Net Income
= (460 - 184) / 460
= 0.6 or 60%
7) Net sale = $6,500
The current capacity is 85%
Then sales at 100% = (6,500/ 85) x 100
= $7,647
That means when the firm is operating at full capacity (that is 100%) the sales would be $7,647.
8) First we have to find the dividend pay out ratio of the firm
= (Dividend / Net Income) x 100
=(184 / 460) x 100
= 40%
Tax rate = (248 / 708) x 100
= 35%
External Financing needed = 335
9) Equity Multiplier is a financial ratio used to find the financial leverage of a firm. It shows how much reliance firm is put on external financing in order to supply its required cash flows. It shows how much risk a investor would take per dollar.
Formula:-
Equity Multiplier = Total Assets / Total Stockholder's Equity
= 8970 / (2400+1190)
= 2.5
Total Stockholder's Equity consists of Common stock and Retained Earnings.