Essay on Chapter 2 Solutions

3. Equity financing = $8,400,000(0.60) = $5,040,000 2011 Dividends = Net income - Equity financing = $14,400,000 - $5,040,000 = $9,360,000 All of the equity financing is done with retained earnings as long as they are available.

Identify the financial statement(s) where each of the following items appears. Use I for income statement, E for statement of retained earnings, and B for balance sheet.

1) Which one of the following items is not generally used in preparing a statement of cash flows?

More important, the numbers used where E= $17054(permanently restricted assets + unrestricted assets), A= $44160(from total assets), D= $27106(Total liabilities and net assets – equity), Rd= 4.86, Re= 10, and T= 0

Complete an income statement, balance sheet and statement of cash flows for 2011. Please provide information on any assumptions you make not already stated in the case.

2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not

Current assets: 2011 Cash and cash equivalents Short-term investments Accounts receivable Prepaid expenses and deposits Loan receivable (note 2) Derivative financial instrument - short term Restricted cash and cash equivalents (note 3) Other assets Capital assets (note 4) $ 13,397 4,130 12,325 17,091 4,290 1,352 52,585 11,808 – 264,350 $ 2010 10,420 10,772 1,739 75,992 – 1,544 100,467 113,040

(Note: retained earnings information is irrelevant here) Part b. Total market value = debt + pref. equity + Common equity = 1,147,200 + 1,250,000 + 2,500,000 = $4,897,200

Please complete the following 7 exercises below in either Excel or a word document (but must be single document). You must show your work where appropriate (leaving the calculations within Excel cells is acceptable). Save the document, and submit it in the appropriate week using the Assignment Submission button.

This changes are very beneficial to the financial health of the company. On the other hand, the long-term liabilities section looks that consolidated its debts with the issuance of bonds to repay all other long-term debts. The total liabilities represent the larger portion of the Liabilities and Stockholder’s Equity section with an average of 77%. The stockholder’s equity saw a total change of 37.69% increase from 2011 to 2012. Its mayor sections were Retained Earnings, with a 333.72% increase; Preferred Stock, with a 100% increase; and Paid-in Capital in excess of Par – preferred, with a 66.67% increase.

The firm estimates profits of approximately $65,000 by Year 3 with a net profit margin of 6%. The company plans on taking on approximately $130,000 in current debt and raise and additional $50,000 in long-term debt to invest in long-term assets. The company does not anticipate any cash flow problems arising.

Balance Sheet (2005 / 2006 / 2007) Income Statement (2005 / 2006 / 2007) Cash Flow Sheet (2005 / 2006 / 2007)

Debt ratio = Total liabilities / total assets = (3,516,952 – 1,977,152) / 3,516,952 = 43.8 %

Computed: PPE = $6876M / $21,695M = 31.7% Intangible assets = $4041M / $21,695M = 22% Computed: $3,374M / $4,841 = 70% Computed: Accounts payable = $4461M / $13,021M = 34.2% Long-term debt = $2651M / $13,021M = 20.4% Computed: Long-term investments = $8214M / $22,417M = 36.6% Current assets = $7171M / $22,417M = 32%

The firm estimates profits of approximately $65,000 by year 3 with a net profit margin of 6%. The company plans on taking on approximately $130,000 in current debt and raise an additional $50,000 in long term debt to invest in long-term assets by 1998. The company does not anticipate any cash flow problems arising. (Berry, 2008)