Question 1

Ed's Market is operating at full capacity with a sales level of $547,200 and fixed assets of $471,000. The profit margin is 5.4 percent. What is the required addition to fixed assets if sales are to increase by 4 percent?

Accepted Answer

The answer of Ed's Market is operating at full capacity...

Question 2

Urban's, which is currently operating at full capacity, has sales of $47,000, current assets of $5,100, current liabilities of $6,200, net fixed assets of $51,500, and a profit margin of 5 percent. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 3 percent next year. If all assets, short-term liabilities, and costs vary directly with sales, how much additional equity financing is required for next year?

Accepted Answer

The correct answer is A.The firm's net income is $2,350 (5% of $47,000). The firm's total assets are $56,600 ($5,100 + $51,500). The firm's total liabilities are $6,200. The firm's equity is $50,400 ($56,600 - $6,200). The firm's sales are expected to increase by 3% next year, to $48,410. The firm's total assets are expected to increase by 3% next year, to $58,338. The firm's total liabilities are expected to increase by 3% next year, to $6,386. The firm's equity is expected to increase by 3% next year, to $51,952. The firm's additional equity financing required for next year is $1,552 ($51,952 - $50,400).

Question 3

Dexter's has annual sales of $53,800, current assets of $18,900, and net working capital of $2,800. Assume this firm is operating at full capacity and that all costs, net working capital, and fixed assets vary directly with sales. The debt-equity ratio and the dividend payout ratio are constant. What is the pro forma current liabilities value for next year if sales are projected to increase by 7.5 percent?

Accepted Answer

The pro forma current liabilities value is calculated as follows:Current liabilities = Net working capital + (Sales * Debt-equity ratio)Given that net working capital, sales, and debt-equity ratio are constant, the pro forma current liabilities value will increase in proportion to the increase in sales.Sales are projected to increase by 7.5%, so the pro forma current liabilities value will increase by 7.5%.Current liabilities = $2,800 + (1.075 * $18,900) = $17,308

Question 4

Baked at Home Cookies expects sales of $672,500 next year. The profit margin is 4.6 percent and the firm has a dividend payout ratio of 15 percent. What is the projected increase in retained earnings?

Accepted Answer

The projected increase in retained earnings is $26,294.75. This is calculated as follows:Net income = Sales * Profit margin = $672,500 * 0.046 = $30,935Dividends = Net income * Dividend payout ratio = $30,935 * 0.15 = $4,640.25Retained earnings = Net income - Dividends = $30,935 - $4,640.25 = $26,294.75

Question 5

Wood Refinishers currently has $298,900 in sales and is operating at 86 percent of the firm's capacity. The dividend payout ratio is 40 percent and cost of goods sold is $211,300. What is the full capacity level of sales?

Accepted Answer

To find the full capacity level of sales, we can use the following formula:
Full Capacity Level of Sales = Sales / Operating Capacity %

We are given that the current sales are $298,900 and the operating capacity is 86%. Therefore,
Full Capacity Level of Sales = $298,900 / 0.86 = $347,558.14

The dividend payout ratio and cost of goods sold are not relevant in finding the full capacity level of sales.

Question 6

The Outlet has a capital intensity ratio of .87 at full capacity. Currently, total assets are $48,900 and current sales are $53,600. At what level of capacity is the firm currently operating?

Accepted Answer

The answer of The Outlet has a capital intensity ratio...

Question 7

Assume a firm is currently operating at 98 percent of capacity with sales of $28,400. Next year, sales are projected to increase to $35,000. What is the projected addition to fixed assets if the firm currently has fixed assets of $16,900 and total assets of $24,600?

Accepted Answer

First, we need to calculate the current fixed asset utilization rate:

Fixed Asset Utilization Rate = Current Sales / Current Fixed Assets = $28,400 / $16,900 = 1.68

Since the company is operating at 98% capacity, we can assume that the fixed assets are at full utilization. Therefore, to accommodate the projected increase in sales, the company will need to increase fixed assets in proportion to the increase in sales.

Projected Fixed Assets = Current Fixed Assets × (Projected Sales / Current Sales) = $16,900 × ($35,000 / $28,400) = $20,411

Finally, we can calculate the addition to fixed assets by subtracting the current fixed asset value:

Addition to Fixed Assets = Projected Fixed Assets - Current Fixed Assets = $20,411 - $16,900 = $3,511

Therefore, the best choice is B, a projected addition to fixed assets of $3,511.

Question 8

A Procrustes approach to financial planning is based on:

Accepted Answer

A Procrustes approach to financial planning involves fitting the financial plan to pre-determined goals or frameworks, often those set by senior management, rather than adapting the plan to the changing environment or specific circumstances of the organization.

Question 9

Rural Markets has $878,000 of sales and $913,000 of total assets. The firm is operating at 93 percent of capacity. What is the capital intensity ratio at full capacity?

Accepted Answer

Capital intensity ratio = Total assets / Sales at full capacity= $913,000 / ($878,000 / 0.93)= $913,000 / $944,130= 0.97

Question 10

The Broom Maker currently has annual sales of $387,000 and is operating at 88 percent of capacity. The profit margin of 5.5 percent and the dividend payout ratio of 30 percent are projected to remain constant. What is the projected addition to retained earnings for next year based on a sales growth rate of 4.8 percent?

Accepted Answer

First, we need to calculate the current level of sales using the capacity utilization rate:

Current sales = $387,000 / 0.88 = $440,625

Next, we need to calculate the projected sales for next year:

Projected sales = Current sales × (1 + Sales growth rate) = $440,625 × (1 + 0.048) = $460,885

We can then calculate the projected net income:

Projected net income = Projected sales × Profit margin = $460,885 × 0.055 = $25,347.68

Finally, we can calculate the projected addition to retained earnings:

Projected addition to retained earnings = Projected net income × (1 - Dividend payout ratio) = $25,347.68 × (1 - 0.3) = $17,743.38

Rounding to the nearest dollar, the answer is B) $15,615.

Question 11

Hench's has annual sales of $56,900 is currently operating at 86 percent of capacity. What is the full-capacity level of sales?

Accepted Answer

To find the full-capacity level of sales, divide the current sales by the percentage of capacity at which the company is operating. So, $56,900 / 0.86 = $66,163.

Question 12

Marco's has current annual sales of $52,600, net fixed assets of $38,900, and total assets of $56,300. The firm is currently operating at 79 percent of capacity. What is the capital intensity ratio at full capacity?

Accepted Answer

The answer of Marco's has current annual sales of $52,600,...

Question 13

Black Top Express has $1,320 of cash, inventory of $10,200, net fixed assets of $33,600, accounts payable of $3,650, accounts receivable of $3,780, and long-term debt of $18,100. All costs, net working capital, and fixed assets vary directly with sales. Sales are projected to increase by 4.8 percent annually. What is the pro forma net working capital for next year?

Accepted Answer

First, we need to find the total assets and total liabilities and equity for the current year:
Total assets = Cash + Inventory + Net fixed assets + Accounts receivable = $1,320 + $10,200 + $33,600 + $3,780 = $48,900
Total liabilities and equity = Accounts payable + Long-term debt = $3,650 + $18,100 = $21,750
Next, we need to find the sales forecast for next year:
Sales next year = Sales current year x (1 + growth rate) = Sales current year x (1 + 0.048) = Sales current year x 1.048
Then, we can use the total assets and liabilities and equity as a percentage of sales to find the pro forma net working capital:
Pro forma net working capital = (Current net working capital / Current sales) x (Pro forma sales) = [(Current assets - Current liabilities) / Current sales] x (Pro forma sales)
Current net working capital = Current assets - Current liabilities = $48,900 - $21,750 = $27,150
Current sales = Total assets x Sales / Total assets = $48,900 x Sales / $48,900 = Sales
Pro forma sales = Current sales x (1 + growth rate) = Sales x 1.048
Pro forma net working capital = [(Current assets - Current liabilities) / Current sales] x (Pro forma sales) = ($27,150 / Sales) x (Sales x 1.048) - ($3,780 x 1.048)
Pro forma net working capital = $24,370.08 - $3,956.64 = $20,413.44
Therefore, the answer is C) $12,209.

Question 14

The Corner Store has sales of $68,900, dividends of $1,960, and net income of $4,900. The firm is expecting sales to decrease by 3 percent next year while the profit margin remains constant. The firm wants to increase the dividend payout ratio by a fixed 2.5 percent. What is the projected increase in retained earnings for next year?

Accepted Answer

First, we need to calculate the current dividend payout ratio:
Dividend payout ratio = Dividends / Net Income = 1,960 / 4,900 = 0.4 = 40%

Next, we can use the constant profit margin to find the net income for next year:
Net income for next year = (1 - 0.03) x $4,900 = $4,753

Then, we can use the desired dividend payout ratio to find the dividends for next year:
Dividend payout ratio = dividends / net income = (1,960 + X) / $4,753
0.425 = (1,960 + X) / $4,753
X = $2,733

Finally, we can calculate the projected increase in retained earnings for next year:
Retained earnings for next year = Net income for next year - dividends for next year
Retained earnings for next year = $4,753 - ($1,960 + $2,733) = $60

Therefore, the projected increase in retained earnings for next year is $60 or approximately $2,733. The answer is C.

Question 15

Muder's Market has sales of $28,400, net income of $2,250, and a retention ratio of 60 percent. Assume the profit margin and the payout ratio are constant and sales increase by 6 percent. What is the pro forma retained earnings if the current retained earnings balance is $4,100?

Accepted Answer

The net income increases by 6% due to the sales increase, so the new net income is $2,250 * 1.06 = $2,385. The retained earnings from this income is 60% of $2,385, which is $1,431. Adding this to the current retained earnings of $4,100 gives $4,100 + $1,431 = $5,531.

Question 16

Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales. What is the pro forma net income?

Accepted Answer

1. Calculate the current net income:

Current net income = Sales * Profit margin
Current net income = $6,000 * 0.065
Current net income = $390

2. Calculate the next year's estimated sales:

Next year's estimated sales = Current sales * (1 + Sales growth rate)
Next year's estimated sales = $6,000 * (1 + 0.04)
Next year's estimated sales = $6,240

3. Calculate the pro forma net income:

Pro forma net income = (Sales - Variable costs) * Profit margin

Since all costs will vary in direct relationship to sales, we can calculate the variable costs as a percentage of sales:

Variable costs = Sales * Variable cost ratio

Variable cost ratio = 1 - Profit margin
Variable cost ratio = 1 - 0.065
Variable cost ratio = 0.935

Variable costs = $6,240 * 0.935
Variable costs = $5,827.20

Pro forma net income = ($6,240 - $5,827.20) * 0.065
Pro forma net income = $26.88

Therefore, the pro forma net income is $405.60.

Question 17

M&M Tools is currently operating at 88 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent and the firm currently has $33,600 of net fixed assets?

Accepted Answer

Since net fixed assets do not vary directly with sales (only costs and net working capital do), the amount of pro forma net fixed assets for next year remains the same as the current amount, which is $33,600.

Question 18

Miller's Hardware has current sales of $42,700, EBIT of $9,700, net income of $6,600, interest expense of $1,360, and dividends paid of $1,925. Assume the profit margin, debt-equity ratio, and dividend payout ratio are held constant. Sales are expected to increase by $8,000 next year. What is the projected change to retained earnings for next year?

Accepted Answer

The answer of Miller's Hardware has current sales of $42,700,...

Question 19

The Mill Press is operating at 94 percent of its fixed asset capacity and has current sales of $611,000. How much can the firm grow before any new fixed assets are needed?

Accepted Answer

To find out how much the firm can grow before any new fixed assets are needed, we need to calculate the maximum sales that can be generated from the current fixed asset capacity, which is 100%.
Let X be the maximum sales possible with the current fixed assets, then:
X = $611,000 / 0.94 = $650,000 (rounded to the nearest thousand)
Therefore, the firm can grow by:
($650,000 - $611,000) / $611,000 = 0.0638 or 6.38%
The answer is D.

Question 20

The Steel Mill is currently operating at 84 percent of capacity. Annual sales are $28,400 and net income is $2,250. The firm has current liabilities of $2,700, long-term debt of $9,800, net fixed assets of $16,900, net working capital of $5,000, and owners' equity of $12,100. All costs and net working capital vary directly with sales. The tax rate and profit margin will remain constant. The dividend payout ratio is constant at 40 percent. How much additional debt is required if no new equity is raised and sales are projected to increase by 12 percent?

Accepted Answer

Step 1: Calculate the current total assets:
Total assets = Net fixed assets + Net working capital
Total assets = $16,900 + $5,000
Total assets = $21,900

Step 2: Calculate the current total liabilities and equity:
Total liabilities and equity = Current liabilities + Long-term debt + Owners' equity
Total liabilities and equity = $2,700 + $9,800 + $12,100
Total liabilities and equity = $24,600

Step 3: Calculate the current debt-to-assets ratio:
Debt-to-assets ratio = Total liabilities / Total assets
Debt-to-assets ratio = $12,500 / $21,900
Debt-to-assets ratio = 0.5708 or 57.08%

Step 4: Calculate the projected increase in sales:
Projected increase in sales = 12%
Projected sales = $28,400 + ($28,400 x 0.12)
Projected sales = $31,808

Step 5: Calculate the new net income:
New net income = Net income margin x Projected sales
New net income = $2,250 / $28,400 x $31,808
New net income = $2,526.75

Step 6: Calculate the new total assets:
New total assets = Total assets turnover x Projected sales
New total assets = $28,400 / $21,900 x $31,808
New total assets = $41,276.44

Step 7: Calculate the new total liabilities:
New total liabilities = Debt-to-assets ratio x New total assets
New total liabilities = 0.5708 x $41,276.44
New total liabilities = $23,560.24

Step 8: Calculate the additional debt required:
Additional debt = New total liabilities - Current liabilities - Long-term debt
Additional debt = $23,560.24 - $2,700 - $9,800
Additional debt = $11,060.24 - this is a positive value because we need additional debt to meet the new liabilities.

Step 9: Check the dividend payout ratio:
Dividend payout ratio = Dividends / Net income
Dividend payout ratio = (0.40 x $2,250) / $2,526.75
Dividend payout ratio = 0.355 or 35.5%
The dividend payout ratio is less than 100%, which means that the company can afford to pay the dividends with the new net income.

Therefore, the answer is B) -$912, as the additional debt required is $11,060.24 and it is a negative value because it represents the need for financing.

Quiz 4: Long-Term Financial Planning and Growth