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Principles of Finance, 6e
Besley/Brigham
Chapter 08
2010
1st pass
2nd pass
Sales
$1,000.00
$1,500.00
$1,500.00
COGS
800.00
1,200.00
1,200.00
EBIT
$ 200.00
$ 300.00
$ 300.00
Interest
16.00
16.00
21.79
Net B.T.
$ 184.00
$ 284.00
$ 278.21
Tax (40%)
73.60
113.60
111.28
Net Income
$ 110.40
$ 170.40
$ 166.93
Dividends (60%)
66.24
102.24
100.16
Add'n to R.E.
$ 44.16
$ 68.16
$ 66.77
Current Assets
$ 700.00
$1,050.00
$1,050.00
Net fixed Assets*
300.00
300.00
300.00
Total assets
$1,000.00
$1,350.00
$1,350.00
A/P and Accruals
$ 150.00
$ 225.00
$ 225.00
N/P 8.00%
200.00
200.00
272.39
Common stock
150.00
150.00
284.45
Retained earnings
500.00
568.16
566.77
Total Liab & Equity
$1,000.00
$1,143.16
$1,348.61
AFN
206.84
1.39
Cum. AFN
206.84
208.23
Profit Margin
11.04%
11.36%
11.13%
ROE
16.98%
23.73
19.61%
Debt/Assets
35.00%
37.18%
36.84%
Current ratio
2.00
2.47
2.11
Payout Ratio
60.00%
60.00%
60.00%
AFN Financing:
Weights
Dollars
N/P
0.3500
72.39
0.49
Common Stock
0.6500
134.45
0.90
1.0000
206.84
1.39
ROE = NI/equity = $166.93/$851.22 = 0.1961 = 19.61%.
POINTS:
1
DIFFICULTY:
Hard
ACCREDITING STANDARDS:
Blooms Taxonomy-1 - Analyzing
Business Program-3 - Analytic
DISC-FIN-03 - Capital Budgeting and Cost of Capital
DISC-FIN-05 - Financial Analysis and Cash Flows
Time Estimate-b - 10 min.
TOPICS:
Financing Feedback and ROE
38. Hogan Inc. generated EBIT of $240,000 this past year using assets of $1,100,000. The interest rate on its existing
long-term debt of $640,000 is 12.5 percent and the firm's tax rate is 40 percent. The firm paid a dividend of $1.27 on each
of its 37,800 shares outstanding from net income of $96,000. The total book value of equity is $446,364 of which the
common stock account equals $335,000. The firm's shares sell for $28.00 per share in the market. The firm forecasts a
10% increase in sales, assets, and EBIT next year, and a dividend of $1.40 per share. If the firm needs additional capital
funds, it will raise 60% with debt and 40% with equity. The cost of any new debt will be 13%. Spontaneous liabilities are
estimated at $15,000 for next year, representing an increase of 10% over this year. Except for spontaneous liabilities, the
firm uses no other sources of current liabilities and will continue this policy in the future. What will be the cumulative
AFN Hogan will need to balance its projected balance sheet using the projected balance sheet method through the first
two passes?
a.
$5,013
b.
$3,417
c.
$51,156
d.
$26,228
e.
$54,573
ANSWER:
e
RATIONALE:
Forecast
Last Year
Basis
First Pass
Feedback
Second Pass
EBIT
$ 240,000
× 1.10
$ 264,000
$ 264,000
− Interest
80,000
− 80,000
+ 3,990
83,990
EBT
$ 160,000
$ 184,000
$ 180,010
− Taxes
64,000
− 73,600
− 72,004
Principles of Finance, 6e
Besley/Brigham
Chapter 08
b.
10.71
c.
71.43
d.
17.86
e.
6.43
ANSWER:
b
RATIONALE:
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-1 - Analyzing
Business Program-3 - Analytic
DISC-FIN-03 - Capital Budgeting and Cost of Capital
DISC-FIN-05 - Financial Analysis and Cash Flows
Time Estimate-a - 5 min.
TOPICS:
DTL
41. Refer to Trident Food Corporation. What is the operating breakeven point in sales units (Q) for Trident Foods?
a.
7,500
b.
5,625
c.
6,825
d.
4,800
e.
2,700
ANSWER:
d
RATIONALE:
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-1 - Analyzing
Business Program-3 - Analytic
DISC-FIN-03 - Capital Budgeting and Cost of Capital
DISC-FIN-05 - Financial Analysis and Cash Flows
Time Estimate-a - 5 min.
TOPICS:
Operating Breakeven Point
42. Refer to Trident Food Corporation. What is the financial breakeven point for Trident Foods?
a.
EBIT = $146,500
b.
Sales = 4,800 units
c.
EBIT = $10,000
d.
Net income = $10,000
Principles of Finance, 6e
Besley/Brigham
Chapter 08
e.
EBIT = $11,400
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-1 - Analyzing
Business Program-3 - Analytic
DISC-FIN-03 - Capital Budgeting and Cost of Capital
DISC-FIN-05 - Financial Analysis and Cash Flows
Time Estimate-a - 5 min.
TOPICS:
Financial Breakeven Point
43. Refer to Trident Food Corporation. How many units of inventory must Trident Foods sell if it wants to operate at its
financial breakeven point?
a.
2,000
b.
500
c.
4,800
d.
2,280
e.
6,800
ANSWER:
e
RATIONALE:
The financial breakeven point is EBITFinancial BEP = I + Dps/(1 − T) = $10,000. Thus, EBIT
= $10,000 = QFinancial BEP(P − V) − F. P = $20, F = $24,000, V = ?. To solve for V, we
need to determine how many units of inventory are being sold at the current level of
sales. The current level of sales in units is equal to $150,000/$20 = 7,500; so, V =
$112,500/7,500 = $15. Plugging this information into the equation given above, we have:
EBIT = $10,000 = QFinancial BEP($20 − $15) −$24,000. Solving for Q yields the following:
POINTS:
1
DIFFICULTY:
Hard
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
DISC-FIN-05 - Financial Analysis and Cash Flows
Time Estimate-a - 5 min.
TOPICS:
Financial Breakeven Point
44. Underestimating the sales in your forecast could have which of the following effects on the firm?
a.
The firm could acquire too many fixed assets.
b.
The firm would have higher costs for depreciation and storage.
c.
The firm could lose market share to their competitors.
d.
The firm would have too high of a total asset turnover.
ANSWER:
c
Principles of Finance, 6e
Besley/Brigham
Chapter 08
Cengage Learning Testing, Powered by Cognero
Page 29
c.
$750,000
d.
$550,000
e.
$1,000,000
ANSWER:
d
RATIONALE:
Operating Profit
= Revenue − Total Operating Costs
= ($13*150,000) − $200,000 − ($8*150,000)
= $550,000
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-1 - Analyzing
Business Program-3 - Analytic
DISC-FIN-03 - Capital Budgeting and Cost of Capital
DISC-FIN-05 - Financial Analysis and Cash Flows
Time Estimate-a - 5 min.
TOPICS:
Operating Costs
53. What is the next step in the financial planning process after a firm develops a sales forecast?
a.
determine additional funds needed to finance operations
b.
determine the assets required to meet the sales target
c.
determine the firm's optimal capital structure
d.
estimate the degree of operating leverage
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
DISC-FIN-05 - Financial Analysis and Cash Flows
Time Estimate-a - 5 min.
TOPICS:
Financial Planning
54. The firm is concerned with implementing the financial plans, and with managing the feedback and adjustment process
needed to ensure that the goals of the firm are met during which stage of the planning and control process
a.
control stage
b.
planning stage
c.
forecasting stage
d.
budgeting stage
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-03 - Capital Budgeting and Cost of Capital
