Concept explainers
To determine: The earnings per share (EPS) under the debt financing and the stock financing alternatives at each possible sales level, expected EPS and σEPS under both debt and stock financing alternatives, and the debt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales level under each alternative.
Balance sheet:
A balance sheet is a financial statement that shows the available assets (owner’s equity and outsider’s equity) and owed liabilities from investing and financial activities of a company. This statement reveals the financial health of company. So, this statement is also called as
It helps the users to know the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities. The main components of balance sheet are assets, liabilities, and
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Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
- Long-Term Financing Needed At year-end 2018, Wallace Landscapings total assets were 2.17 million, and its accounts payable were 560,000. Sales, which in 2018 were 3.5 million, are expected to increase by 35% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to 625,000 in 2018, and retained earnings were 395,000. Wallace has arranged to sell 195,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends. a. What were Wallaces total long-term debt and total liabilities in 2018? b. How much new long-term debt financing will be needed in 2019? [Hint: AFN New stock = New long-term debt.)arrow_forwardLONG-TERM FINANCING NEEDED At year-end 2019, total assets for Arrington Inc. were 1.8 million and accounts payable were 450,000. Sales, which in 2019 were 3.0 million, are expected to increase by 25% in 2020. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to 500,000 in 2019, and retained earnings were 475,000. Arrington plans to sell new common stock in the amount of 130,000. The firms profit margin on sates is 5%; 35% of earnings will be retained. a. What were Arringtons total liabilities in 2019? b. How much new long-term debt financing will be needed in 2020? (Hint: AFN - New stock = New long-term debt.)arrow_forwardIncome, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Prepare a schedule showing the effect of the notes on net income in each of the 4 years.arrow_forward
- Income, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: 1. Prepare a schedule showing annual cash flows fur the two notes in each of the 4 years.arrow_forwardIncome, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Which figure, net income or net cash flow, does the better job of telling the banks stock-holders about the effect of these notes on the bank? Explain by reference to the schedules prepared in Requirements 1 and 2.arrow_forwardTopic: Financial Planning & Forecasting At year-end 2018, total assets for ABC Inc. were $1.8 million and accounts payable were $450,000. Sales, which in 2018 were $3 are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales (grow at the same rate). ABC typically uses no current liabilities other than accounts payable. Common stock amounted to $500,000 in 2018, and retained earnings were $475,000. ABC plans to sell new common stock in the amount of $130,000. The firm's profit margin on sales is 5%; 35% of earnings will be retained. a. What were ABC's total liabilities in 2018? b. How much new long-term debt financing will be needed in 2019? (Hint: AFN - New stock = New long-term debt)arrow_forward
- Energy Plus Limited (EP) is operating in the booming energy sector. The company recognized that to stay competitive it must implement projects which would reduce the cost of products to its customers. EP’s board of directors approved the recommendation to finance the project by issuing new debt. On January 1, 2014, EP issued new bonds which will mature on December 31, 2038. The bonds have a par value of $1,000 and a coupon rate of 12%. Coupon payments are made semi-annually. a) What would be the value of the bonds on December 31, 2018, if the interest rates had risen to 16%? Based on the price of the bond, how would you classify the bond? b) What would be their value on June 30, 2026, if interest rates had fallen to 8%? Based on the price of the bond, how would you classify the bond? c) If the bonds had a value of $860.00 on June 30, 2024, what would be their yield to maturity on that date?arrow_forwardQuestion # Paco Company --Additional Financing Needed Assume sales grow 40% in 2021 over 2020; the average collection period increases by 9 days in 2021 compared to 2020 (360 days in the year), inventory turnover based on sales decreases by 1 in 2021 compared to 2020, PACO pays a constant percentage of Net Income as a dividend, and 2020 net fixed assets are operating at 90% capacity. Estimate the following ratios for PACO after the first pass for 2021 assuming any additional financing needed is obtained 25% with notes payables and 75% long-term debt. Assume in 2020; short-term interest rates were 3% points less than long-term rates, i. e if short-term rates are 6%, then long-term rates are 9%. Assume further that rates are expected to remain at those levels in 2021. Finally, any remaining AFN after 1st pass is included in the total debt for ratios. Current Ratio? Times Interest Earned Ratio? Total Debt Ratio?arrow_forwardWildhorse Aristocrat nc. (WA) borrowed $320.000 from Grow Business Bank to finance the purchase of equipment costing $240,000 and to provide $80,000 in cash. The legal documentation states that the loan matures in 20 years, and the principal is to be paid in annual installments of $16,000. The terms of the loan also indicate that WA must maintain a current ratio of 1.25 and cannot pay dividends that will reduce retained earnings below $160,000. The 2024 year-end statement of financial position, immediately prior to the bank loan and the purchase of equipment, follows: Current assets $178.800 Current liabilities $120,000 Non-current assets 618.320 Long-term liabilities 320,000 Common shares 160,000 Retained earnings 197,120 Total assets $797,120 Total liabilities and shareholders' equity $797,120 Prepare the following statement of financial position assuming the maximum dividend is declared and paid. Calculate the current ratio using the updated statement of financial position (round…arrow_forward
- ABC Limited is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixes assets total $1 million, and the firm plans to maintain a 60% debt-to- assets ratio. ABC Limited’s weighted average interest rate is currently 8% on short- and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the profits tax rate is 40%.(Assumption: debt = liabilities, debt-to-assets = total liabilities / total assets) What is the expected return on equity under each current assets…arrow_forwardGlobal Telecom Inc. has positive cash flows from operating activities of $84,000, negative cash flows from investing activities of $160,000, and positive cash flows from financing activities of $110,000 for 2020. During 2020 Global Telecom issued 10,000 common shares for $100,000 and issued bonds for $10,000 which were used to purchase equipment to expand production. Analyze Global Telecom’s financial flexibility.arrow_forwardABC Limited is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixes assets total $1 million, and the firm plans to maintain a 60% debt-toassets ratio. ABC Limited’s weighted average interest rate is currently 8% on short- and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the profits tax rate is 40%. (Assumption: debt = liabilities, debt-to-assets = total liabilities / total assets) a) What is the expected return on equity under each current assets…arrow_forward
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