Finance Questionnaire

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Chapter 12 Question Baxter Video Product's sales are expected to increase by 20% from $5M in 2010 to $6M in 2011. Its assets totaled $3M at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1M, consisting of $250K of accounts payable, $500K of notes payable, and $250K of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter's additional funds needed for the coming year. S0 = $5,000,000 g = 20% S1 = S0 * (1+g) S1 = $5M * (1+20%) S1 = $6,000,000 gS0 = $1,000,000 (Change in Sales) A0* = $3,500,000 A0*/S0 = 70% L0* = $1,000,000 L0*/S0 = 20% Profit Margin = 5% Payout Ratio (POR)= 70% AFN = (A0*/S0) S (L0*/S0) S S1 * M * (1-POR) AFN = (70%*1,000,000) (20%*1,000,000) ($6,000,000*5%*(1-70%)) AFN = 700,000 200,000 90,000 AFN = 410,000 Chapter 13 Question Explain how it is possible for sales growth to decrease the value of a profitable company. A company can be profitable and yet have an Return on Invested Capital (ROIC) that is less than the Weighted Average Cost of Capital (WACC), if the company has large capital requirements. If the ROIC is less than the WACC, then the company is not earning enough on its capital to satisfy investors. Growth adds even more capital that is not satisfying investors, hence, growth decreases value. It is thus clear that
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