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In: Finance

Current Income Statement                                      &nb

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?

                            

Solutions

Expert Solution

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.

jeff jeffy answered 3 months ago
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