This Year’s Actual Results Next Year’s Initial Forecast Net sales $17,000,000 $20,060,000 Cost of goods sold 13,600,000 16,048,000 Gross profit $3,400,000 $4,012,000 Fixed operating costs except depreciation 850,000 850,000 Depreciation 340,000 401,200 Earnings before interest and taxes $2,210,000 $2,607,800 Interest 340,000 340,000 Earnings before taxes $1,870,000 $2,267,800 Taxes 748,000 907,120 Net income $1,122,000 1,360,680 Common dividends 605,880 605,880 Addition to retained earnings $516,120 $754,800 Earnings per share $0.22 $0.27 Dividends per share $0.12 $0.12 Number of common shares (millions) 5.00 5.00 Which of the following are assumptions made by the initial income statement forecast? Check all that apply. The forecasted increase in net sales is 18.00%. No additional external financing will be required. The assigned depreciation method has changed. The facility is not currently operating at full capacity. The facility is currently operating at full capacity. Which of the following could be a direct cause of financing feedback? Check all that apply. Borrowing from the bank Purchasing additional buildings with internally generated funds Repaying outstanding bonds Issuing additional common stock What is one of the potential consequences of financing feedback that might cause the actual financing needs to be higher than initially thought? Financing feedback might: Spontaneously increase liabilities associated with the cost of goods sold Reduce the level of cash on hand Increase charges against net income, reducing the amount of available internally generated funds Increase the length of the operating cycle

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 8EP

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This Year’s Actual Results	Next Year’s Initial Forecast
Net sales	$17,000,000	$20,060,000
Cost of goods sold	13,600,000	16,048,000
Gross profit	$3,400,000	$4,012,000
Fixed operating costs except depreciation	850,000	850,000
Depreciation	340,000	401,200
Earnings before interest and taxes	$2,210,000	$2,607,800
Interest	340,000	340,000
Earnings before taxes	$1,870,000	$2,267,800
Taxes	748,000	907,120
Net income	$1,122,000	1,360,680
Common dividends	605,880	605,880
Addition to retained earnings	$516,120	$754,800
Earnings per share	$0.22	$0.27
Dividends per share	$0.12	$0.12
Number of common shares (millions)	5.00	5.00

Which of the following are assumptions made by the initial income statement forecast? Check all that apply.

The forecasted increase in net sales is 18.00%.

No additional external financing will be required.

The assigned depreciation method has changed.

The facility is not currently operating at full capacity.

The facility is currently operating at full capacity.

Which of the following could be a direct cause of financing feedback? Check all that apply.

Borrowing from the bank

Purchasing additional buildings with internally generated funds

Repaying outstanding bonds

Issuing additional common stock

What is one of the potential consequences of financing feedback that might cause the actual financing needs to be higher than initially thought? Financing feedback might:

Spontaneously increase liabilities associated with the cost of goods sold

Reduce the level of cash on hand

Increase charges against net income, reducing the amount of available internally generated funds

Increase the length of the operating cycle

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