American University of Science &Technology

Faculty of Business & Economics

Gradute Program
Department of Finance
Fall 2020-2021

Extra Problems
1) Swann Systems is forecasting the following income statement for the upcoming year:
Sales $5,000,000
Operating costs (excluding depreciation and amortization) 3,000,000
EBITDA $2,000,000
Depreciation and amortization 500,000
EBIT $1,500,000
Interest 500,000
EBT $1,000,000
Taxes (40%) 400,000
Net income $ 600,000

The company’s president is disappointed with the forecast and would like to see Swann
generate higher sales and a forecasted net income of $2,000,000.

Assume that operating costs (excluding depreciation and amortization) are always 60 percent
of sales. Also, assume that depreciation and amortization, interest expense, and the
company’s tax rate, which is 40 percent, will remain the same even if sales change. What
level of sales would Swann have to obtain to generate $2,000,000 in net income?
A=$10,833,333

2) Lombardi Trucking Company has the following data:

Assets $10,000
Profit margin 3.0%
Tax rate 40%
Debt ratio 60.0%
Interest rate 10.0%
Total assets turnover 2.0

What is Lombardi’s TIE ratio? A=2.67x

3) Rowe and Company has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit
margin of 10 percent. The president is unhappy with the current return on equity, and he
thinks it could be doubled. This could be accomplished:
a) By increasing the profit margin to 14 percent
b) By increasing debt utilization.

FIN 500 Extra Problems Page 1

 Total assets turnover will not change. What new debt ratio, along with 14 percent profit
margin, is required to double the return on equity? A=65%

4) Altman Corporatio has $1,000,000 of debt outstanding, and it pays an interest rate of 12
percent annually. Altman’s annual sales are $4 million, its federal-plus-state tax rate is 40
percent, and its net profit margin on sales is 10 percent. If the company does not maintain
a TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will
result. What is Altman’s TIE ratio? A=6.56x

5) The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities.
Its initial inventory level is $375,000, and it will raise funds as additional notes payable
ans use them to increase inventory. How much can Petry’s short-term debt (notes
payable) increases without pushing its current ratio below 2.0? A=$262,500

6) Taft Technologies has the following relationships:

Annual sales $1,200,000

Current liabilities $ 375,000
Days sales outstanding (ACP) (365-day year) 40.00
Inventory turnover ratio 4.80
Current ratio 1.20

The company’s current assets consist of cash, inventories, and accounts receivable. How
much cash does Taft have on its balance sheet? A=$68,493

7) A firm with net income of $500,000 pays 48% of its earnings in dividends. If the firm has
150,000 shares of common stock outstanding, what is the dividend paid per share of stock?
A=$1.60/Share

8) Kenney Corporation recently reported the following income statement for 2002 (numbers are
in millions of dollars):

Sales $7,000
Operating costs 3,000
EBIT $4,000
Interest 200
Earnings before taxes (EBT) $3,800
Taxes (40%) 1,520
Net income available to
common shareholders $2,280

The company forecasts that its sales will increase by 10 percent in 2003 and its operating costs
will increase in proportion to sales. The company’s interest expense is expected to remain at
$200 million, and the tax rate will remain at 40 percent. The company plans to pay out 50
 American University of Science &Technology
Faculty of Business & Economics
Gradute Program
Department of Finance
Fall 2020-2021
percent of its net income as dividends, the other 50 percent will be additions to retained
earnings. What is the forecasted addition to retained earnings for 2003? A=$1,260

9) A firm has the following balance sheet:

Cash $ 20 Accounts payable $ 20

Accounts receivable 20 Notes payable 40
Inventories 20 Long-term debt 80
Fixed assets 180 Common stock 80
Retained earnings 20
Total liabilities
Total assets $240 and equity $240

Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity,
but its current assets were at optimal levels. Sales are expected to grow by 5 percent next year,
the profit margin is 5 percent, and the dividend payout ratio is 60 percent. How much additional
funds (AFN) will be needed? A= -$6.4

10) Your company has the following balance sheet (in millions of dollars):

Current assets $4.0 Accounts payable $0.8

Net fixed assets 4.0 Notes payable 1.0
Accrued wages and taxes 0.2
Long-term debt 1.5
Common equity 1.5
Retained earnings 3.0
Total liabilities
Total assets $8.0 and equity $8.0

You have determined the following facts: (1) last year’s sales were $10 million; (2) the
company will pay out 40 percent of earnings as dividends; (3) a profit margin of 3 percent is
projected; (4) fixed assets were used to full capacity; and (5) all assets as well as spontaneous
liabilities as shown on the balance sheet are expected to grow proportionally with sales.
Further, your boss estimates she will need to raise $2 million externally by issuing new debt or
common stock next year. If the above assumptions hold, what rate of sales growth is your boss
expecting? (Hint: You can use the AFN formula to help answer this problem.) A= 31.96%

FIN 500 Extra Problems Page 3

 11) Condensed financial data of Penny Company appear below:

AAAAAA COMPANY
Comparative Balance Sheet
December 31
2014 2013
Assets
Cash $ 82,000 $ 35,000
Accounts receivable 85,000 53,000
Inventories 120,000 132,000
Prepaid expenses 19,000 25,000
Investments 90,000 75,000
Plant assets 310,000 250,000
Accumulated depreciation (65,000) (60,000)
Total $641,000 $510,000

Liabilities and Stockholders' Equity

Accounts payable $ 93,000 $ 75,000
Accrued expenses payable 29,000 24,000
Bonds payable 130,000 160,000
Common stock 245,000 170,000
Retained earnings 144,000 81,000
Total $641,000 $510,000

Additional information:

1. Net income for the year is $87,000.

2. Old plant assets costing $25,000 were sold for $10,000 cash when book value was $13,000.

Instructions:
a) Prepare a statement of cash flows for the year using the indirect method.
b) Based on the information provided in the question, and your answer to part (a) above,
critically assess AAAAAA’s cash flow position and overall performance for 2014. What
advice would you offer to the firm’s management?