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What is the 'UNLEVERED PROFIT AFTER TAX' in the year 2019?
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- fin320 (Capital structure analysis)The Karson Transport Company currently has net operating income of $494,000 and pays interest expense of $194,000. The company plans to borrow $1.05 million on which the firm will pay 12 percent interest. The borrowed money will be used to finance an ivestment that is expected to increase the firm's net operating income by $397,000 a year. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? The times interest earned ratio is ___times. (Round to two decimal places.) What effect will the loan and the investment have on the firm's times interest earned ratio? The new times interest earned ratio ___times. (Round to two decimal places.)Minicase In March 2020, the management team of Londonderry Air (LA) met to discuss a proposal to purchase five shorthaul aircraft at a total cost of $25 million. There was general enthusiasm for the investment and the new aircraft were expected to generate an annual cash flow of $4 million for 20 years. The focus of the meeting was on how to finance the purchase. LA had $20 million in cash and marketable securities (see table), but Ed Johnson the chief financial officer pointed out that the company needed at least $10 million in cash to meet normal outflow and as a contingency reserve. This meant that there would be a cash defficiency of $15 million, which the firm would need to cover either by the sale of common stock or by additional borrowing. while admitting that the arguments were finely balanced, mR. Johnson recommended an issue of stock. He pointed out that the airline industry was subject to wide swings in profits and the firm should be careful to avoid the risk of excessive…Calculate the risk-weighted asset for this amount. A Commercial Banking business line (15%) that reports positive profits in the last 3 years: $750,000.00 in 2017, $600,000.00 in 2018, $300,000.00 in 2019. For $550,000.00 MXN Select one: a.$82,500.00 MXN. b.$99,000.00 MXN. c.$28,500.00 MXN. d.$66,000.00 MXN.
- (Capital structure analysis) The Karson Transport Company currently has net operating income of $498,000 and pays interest expense of $202,000. The company plans to borrow $1.13 million on which the firm will pay 11 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm's net operating income by $399,000 a year. a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? b. What effect will the loan and the investment have on the firm's times interest earned ratio? a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? The times interest earned ratio is nothing times. (Round to two decimal places.)AFN Equation Refer to Problem 9-1. What would be the additional funds needed if the companys year-end 2018 assets had been 7 million? Assume that all other numbers, including sales, are the same as in Problem 9-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 9-1? Is the companys capital intensity ratio the same or different?INTEGRATED CASE NEW WORLD CHEMICALS INC. FINANCIAL FORECASTING Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast for 2017. NWCs 2016 sales were 2 billion, and the marketing department is forecasting a 25% increase for 2017. Wilson thinks the company was operating at full capacity in 2016, but she is not sure. The first step in her forecast was to assume that key ratios would remain unchanged and that it would be business as usual at NWC. The 2016 financial statements, the 2017 initial forecast, and a ratio analysis for 2016 and the 2017 initial forecast are given in Table IC 16.1. Assume that you were recently hired as Wilsons assistant and that your first major task is to help her develop the formal financial forecast. She asks you to begin by answering the following questions. a. Assume (1) that NWC was operating at full capacity in 2016 with respect to all assets, (2) that all assets must grow at the same rate as sales, (3) that accounts payable and accrued liabilities also will grow at the same rate as sales, and (4) that the 2016 profit margin and dividend payout will be maintained. Under those conditions, what would the AFN equation predict the companys financial requirements to be for the coming year? b. Consultations with several key managers within NWC, including production, inventory, and receivable managers, have yielded some very useful information. 1. NWCs high DSO is largely due to one significant customer who battled through some hardships the past 2 years but who appears to be financially healthy again and is generating strong cash flow. As a result, NWCs accounts receivable manager expects the Firm to lower receivables enough for a calculated DSO of 34 days without adversely affecting sales. 2. NWC was operating slightly below capacity; but its forecasted growth will require a new facility, which is expected to increase NWCs net Fixed assets to 700 million. 3. A relatively new inventory management system (installed last year) has taken some time to catch on and to operate efficiently. NWCs inventory turnover improved slightly last year, but this year NWC expects even more improvement as inventories decrease and inventory turnover is expected to rise to 10. Incorporate that information into the 2017 initial forecast results, as these adjustments to the initial forecast represent the final forecast for 2017. (Hint: Total assets do not change from the initial forecast.) c. Calculate NWCs forecasted ratios based on its final forecast and compare them with the companys 2016 historical ratios, the 2017 initial forecast ratios, and the industry averages. How does NWC compare with the average firm in its industry, and is the companys financial position expected to improve during the coming year? Explain. d. Based on the final forecast, calculate NWCs free cash flow for 2017. How does this FCF differ from the FCF forecasted by NWCs initial business as usual forecast? e. Initially, some NWC managers questioned whether the new facility expansion was necessary, especially as it results in increasing net fixed assets from 500 million to 700 million (a 40% increase). However, after extensive discussions about NWC needing to position itself for future growth and being flexible and competitive in todays marketplace, NWCs top managers agreed that the expansion was necessary. Among the issues raised by opponents was that NWCs fixed assets were being operated at only 85% of capacity. Assuming that its fixed assets were operating at only 85% of capacity, by how much could sales have increased, both in dollar terms and in percentage terms, before NWC reached full capacity? f. How would changes in the following items affect the AFN: (1) the dividend payout ratio, (2) the profit margin, (3) the capital intensity ratio, and (4) NWC beginning to buy from its suppliers on terms that permit it to pay after 60 days rather than after 30 days? (Consider each item separately and hold all other things constant.) TABLE IC 16.1 Financial Statements and Other Data on NWC (Millions of Dollars) A. Balance Sheets 2016 2017E Cash and equivalents 20 25 Accounts receivable 240 300 Inventories 240 300 Total current assets 500 625 Net fixed assets 500 625 Total assets 1,000 1,250 Accounts payable and accrued liabilities 100 125 Notes payable 100 190 Total current liabilities 200 315 Long-term debt 100 190 Common stock 500 500 Retained earnings 200 245 Total liabilities and equity 1,000 1.250 B. Income Statements 2016 2017E Sales 2,000.00 2,500.00 Variable costs 1,200.00 1,500.00 Fixed costs 700.00 875.00 Earnings before interest and taxes (EBIT) 100.00 125.00 Interest 16.00 16.00 Earnings before taxes (EBT) 84.00 109.00 Taxes (40%) 33.60 43.60 Net income 50.40 65.40 Dividends (30%) 15.12 19.62 Addition to retained earnings 35.28 45.78
- Integrated Case NEW WORLD CHEMICALS INC. 16-16 FINANCIAL FORECASTING Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast for 2015. NWCs 2014 sales were 2 billon, and the marketing department is forecasting a 25% increase for 2015. Wilson thinks the company was operating at full capacity in 2014, but she is not sure. The first step in her forecast was to assume that key ratios would remain unchanged and that it would be business as usual at NWC The 2014 financial statements, the 2015 initial forecast, and a ratio analysis for 2014 and the 2015 initial forecast are given in Table 1C 16.1. Assume that you were recently hired as Wilsons assistant and that your first major task is to help her develop the formal financial forecast. She asks you to begin by answering the following questions. a. Assume (1) that NWC was operating at full capacity in 2014 with respect to all assets. (2) that all assets must grow at the same rate as sales. (3) that accounts payable and accrued liabilities also will grow at the same rate as sales, and (4) that the 2014 profit margin and dividend payout will be maintained. Under those conditions, what would the AFN equation predict the company's financial requirements to be for the coming year? b. Consultations with several key managers within NWC, including production, inventory, and receivable managers, have yielded some very useful information. 1. NWCs high DSO is largely due to one significant customer who battled through some hardships the past 2 years but who appears to be financially healthy again and is generating strong cash flow. As a result, NWCs accounts receivable manager expects the firm to lower receivables enough for a calculated DSO of 34 days without adversely affecting sales. 2. NWC was operating slightly below capacity; but its forecasted growth will require a new facility, which is expected to increase NWC's net fixed assets to 700 million. 3. A relatively new inventory management system (installed last year) has taken some time to catch on and to operate efficiently. NWC's inventory turnover improved slightly last year, but this year NWC expects even more improvement as inventories decrease and inventory turnover is expected to rise to 10 . Incorporate that information into the 2015 initial forecast results, as these adjustments to the initial forecast represent the final forecast for 2015. (Hint: Total assets do not change from the initial forecast.) c. Calculate NWCs forecasted ratios based on its final forecast and compare them with the companys 2014 historical ratios, the 2015 initial forecast ratios, and the industry averages. How does NWC compare with the average firm in its industry, and is the companys financial position expected to improve during the coming year? Explain. d. Based on the final forecast, calculate NWCs free cash flow for 2015. How does this FCF differ from the POP forecasted by NWC's initial business as usual forecast? e. Initially, some NWL managers questioned whether the new iacility expansion was necessary, especially as it results in increasing net fixed assets from 500 million to 700 million (a 40% increase). However, after extensive discussions about NWC needing to position itself for future growth and being flexible and competitive in todays marketplace, NWCs top managers agreed that the expansion was necessary. Among the issues raised by opponents was that NWCs fixed assets were being operated at only 85% of capacity. Assuming that its fixed assets were operating at only 85% of capacity, by how much could sales have increased, both in dollar terms and in percentage terms, before NWC reached full capacity? f. How would changes in the following items affect the AFN: (1) the dividend payout ratio, (2) the profit margin, (3) the capital intensity ratio, and (4) NWC beginning to buy from its suppliers on terms that permit it to pay after 60 days rather than after 30 days? (Consider each item separately and hold all other things constant) Financial Statements and Other Data on NWC (Millions of Dollars) Table 1C 16.1 A. Balance Sheets 2014 2015E Cash and equivalents 20 25 Accounts receivable 240 300 Inventories 240 300 Total current assets S 500 625 Net fixed assets 500 625 Total assets 1,000 1,250 Accounts payable and accrued liabilities 100 125 Notes payable 100 190 Total current liabilities 200 315 Long-term debt 100 190 Common stock 500 500 Retained earnings 200 245 Total liabilities and equity 1,000 1,250 B. Income Statements 2014 2015E Sales 2,000.00 2,500.00 Variable costs 1,200.00 1,500.00 Fixed costs 700.00 875.00 Earnings before interest and taxes (EBIT) 100.00 125.00 Interest 16.00 16.00 Earnings before taxes (EBT) 84.00 109.00 Taxes (40%) 33.60 43.60 Net income 50.40 65.40 Dividends (30%) 15.12 19.62 Addition to retained earnings 35.28 45.78 C. Key Ratios NWC (2014) NWC (2015E) Industry Comment Basic earning power 10.00% 10.00% 20.00% Profit margin 232 2.62 4.00 Return on equity 7.20 8.77 15.60 Days sales outstanding (365 days) 43.80 days 43.80 days 32.00 days Inventory turnover 8.33 8.33 11.00 Fixed assets turnover 4.00 4.00 5.00 Total assets turnover 2.00 2.00 2.50 Total 1iabi1ities/Assets 30.00% 40.40% 36.00% Times interest earned 6.25 7.81 9.40 Current ratio 2.50 1.99 3.00 Payout ratio 30.00% 30.00% 30.00%Begin with the partial model in the file Ch02 P21 Build a Model.xlsx on the textbooks Web site. a. Using the financial statements shown here for Lan Chen Technologies, calculate net operating working capital, total net operating capital, net operating profit after taxes, free cash flow, and return on invested capital for 2020. The federal-plus-state tax rate is 25%. b. Assume there were 15 million shares outstanding at the end of 2019, the year-end closing stock price was 65 per share, and the after-tax cost of capital was 10%. Calculate EVA and MVA for 2020. Lan Chen Technologies: Income Statements for Year Ending December 31 (Millions of Dollars) Lan Chen Technologies: December 31 Balance Sheets (Thousands of Dollars)