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Chapter 12
Corporate Valuation and Financial Planning
ANSWERS TO END-OF-CHAPTER QUESTIONS
12-1 a. The operating plan provides detailed implementation guidance designed to
b. Spontaneous liabilities are the first source of expansion capital as these accounts
increase automatically through normal business operations. Examples of spontaneous
liabilities include accounts payable, accrued wages, and accrued taxes. No interest is
normally paid on these spontaneous liabilities; however, their amounts are limited due
The higher a firm’s profit margin, the larger the firm’s net income available to support
increases in its assets. Consequently, the firm’s need for external financing will be
c. Additional funds needed (AFN) are those funds required from external sources to
increase the firm’s assets to support a sales increase. A sales increase will normally
require an increase in assets. However, some of this increase is usually offset by a
needed
funds
Additional
=
increase
asset
Required
–
liab.
sspontaneou
in Increase
–
earnings
retained
in Increase
Capital intensity is the dollar amount of assets required to produce a dollar of sales.
The capital intensity ratio is the reciprocal of the total assets turnover ratio. It is
Self-supporting g =
)S)(POR1(M *L *A
)S)(POR1(M
000
0
d. The forecasted financial statement approach using percent of sales develops a
complete set of financial statements that can be used to calculate projected EPS, free
e. A firm has excess capacity when its sales can grow before it must add fixed assets
such as plant and equipment. “Lumpy” assets are those assets that cannot be acquired
f. Full capacity sales are calculated as actual sales divided by the percentage of capacity
at which fixed assets were operated. The target fixed assets to sales ratio is calculated
12-3 The equation gives good forecasts of financial requirements if the ratios A0*/S and L0*/S,
12-4 The five key factors that impact a firm’s external financing requirements are: Sales
12-5 The self-supporting growth rate is the maximum rate a firm can achieve without having
to raise external capital. The self-supporting growth rate is calculated using the AFN
12-6 a. +.
b. +. It reduces spontaneous funds; however, it may eventually increase retained
earnings.
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
12-1 AFN = (A0*/S0)∆S – (L0*/S0)∆S – (PM)(S1)(1 – payout rate)
=
000,000,8$
000,000,5$
$1,200,000 –
000,000,8$
000,900$
$1,200,000 – 0.06($9,200,000)(1 – 0.4)
12-2 AFN =
000,000,8$
000,000,7$
$1,200,000 –
000,000,8$
000,900$
$1,200,000 – 0.06($9,200,000)(1 – 0.4)
The capital intensity ratio is measured as A0*/S0. This firm’s capital intensity ratio is
12-3 AFN = (0.625)($1,200,000) – (0.1125)($1,200,000) – 0.06($9,200,000)(1 – 0)
Under this scenario the company would have a higher level of retained earnings
which would reduce the amount of additional funds needed.
12-4 S0 = $5,000,000; A0* = $2,500,000; CL = $700,000; NP = $300,000; AP = $500,000;
Sales can increase by $5,202,312 – $5,000,000 = $202,312 without additional funds
being needed.
12-5 a.
equity and
liab. Total
=
payable
Accounts
+
debt
term-Long
+
stock
Common
+
earnings
Retained
b. Assets/Sales (A0*/S0) = $2,170,000/$3,500,000 = 62%.
AFN = (A0*/S0)(∆S) – (L0*/S0)(∆S) – (M)(S1)(1 – payout) – New common stock
Alternatively, using the forecasted financial statement method:
2016
Forecast
basis is %
of 2016
Sales
Additions
(New
Financing
and ΔRE) 2017
Sales $3.500,000 $4,725,000
Total assets $2,170,000 0.62 $2,929,500
AFN = Total assets – Preliminary total liabilities & equity = S2,929,500 – 2,690,937 = $238,563
AFN = Additional required long-term debt =$238,563
*Given in problem that firm will sell new common stock = $195,000.
12-6 Cash $ 100.00 2.0 = $ 200.00
Accounts receivable 200.00 2.0 = 400.00
AFN = $
360.00
**Addition to RE = (M)(S1)(1 – Payout ratio) = 0.05($2,000)(0.4) = $40.
12-7 a. AFN = (A0*/S0)(S) – (L0*/S0)(S) – (M)(S1)(1 – payout)
350$
5.122$
350$
5.17$
350$
5.10$
b. Self-supporting g =
)S)(POR1(M *L *A
)S)(POR1(M
000
0
=
)350)(4.1(03. 7.51 5.122
)350)(40.01(03.0
c. Upton Computers
Pro Forma Balance Sheet
December 31, 2017
(Millions of Dollars)
Forecasted sales = $420 million
Profit margin = M = $10.5/$350 = 3%.
Payout ratio = $4.2/$10.5 = 40%.
The additional investment in assets is equal to the change in total assets because there are
not short-term investments:
The additional financing from the increase in spontaneous liabilities and from the
reinvested earnings is:
Financing surplus (deficit) = Additional financing – Additional assets
Because this is negative, it is a financing deficit. This means the LOC should be $13.44.
2016
Forecast
Basis:
Percent of
forecasted
sales Additions
2017 Pro
Forma Financing
2017 Pro
Forma after
Financing
Cash $ 3.5 0.0100 $ 4.20 $ 4.20
Receivables 26.0 0.0743 31.20 31.20
Inventories 58.0 0.1657 69.60 69.60
Total current assets $ 87.5 $105.00 $105.00
Net fixed assets 35.0 0.100 42.00 42.00
Deficit = $ 13.44
12-8 Stevens Textiles
Pro Forma Income Statement
December 31, 2017
(Thousands of Dollars)
a.
2017
Forecast 2017
2016 Basis Pro Forma
Sales $36,000 1.15 Sales16 $41,400
Operating costs 32,440 0.9011 Sales17 37,306
EBIT $ 3,560 $ 4,094
Stevens Textiles
Pro Forma Balance Sheet
December 31, 2017
(Thousands of Dollars)
2016
Forecast
Basis %
2017 Sales Additions
2017 Pro
Forma
2017
Financing
2017 Pro
Forma after
Financing
Cash
$
1,080 0.0300 $ 1,242 $ 1,242
Accts receivable 6,480 0.1800 7,452 7,452
Inventories
9,00
0 0.2500 10,350 10 ,350
Total curr. assets
$16,56
0 $19,044 $19,044
12,60
*From income statement.
The additional investment in assets is equal to the change in total assets because there are
not short-term investments:
The additional financing from the increase in spontaneous liabilities and from the
reinvested earnings is:
Financing surplus (deficit) = Additional financing – Additional assets
c. If debt is added throughout the year rather than only at the end of the year, interest
