Given the following information:
Total assets
$100,000
Debt
(12% interest rate)
$80,000
Equity
$20,000
Variable costs of
production
$14 per unit
Fixed cost of
production
$27,000
Units Sold
12,300
Sales price
$19.75
per unit
What happens to operating income and net income if output is
increased by 10 percent? Verify your answer.
A firm needs $100 to start and
has the following expectations:
Sales
$200
Expenses
$185
Tax rate
33% of
earnings
What are earnings if the owners invest the $100?
If
the firm borrows $40 of the $100 at an interest rate of 10%, whatare the firm’s
net earnings?
What is the return on the owners’ investment in each case? Why
do the returns differ?
If expenses rise to $194, what will be the returns in
each case?
In which case did the returns decline more?
What
generalization can you draw from the above?
A firm with sales of $5,000 has
the following balance sheet:
Assets, Liabilities and Equity as of
xx/xx/xx
Assets
Liabilities and Equity
Accounts
receivable
$1,300
Accounts
payable
$1,200
Inventory
1,600
Long-term
debt
2,500
Plant
1,700
Equity
900
Total
$4,600
Total
$4,600
The
firm earns 20 percent on sales and expects those sales to rise to$5,500. The
increased sales may require additional financing. Accountsreceivable and
inventory will increase, and trade accounts will also spontaneouslyincrease
with the increase in sales. Management expects to distribute 75%of
earnings.
Determine the new balance sheet entries for those assets and
liabilities that spontaneously change with the level of sales usingthe percent
of sales technique. (Accounts receivable, inventory, and accountspayable vary
with sales; the other entries do not). Round off to nearestpercentage point,
such as 22% or .22.
Will the firm need external financing to achieve sales
of $5,500?
Construct the pro forma balance sheet for sales of $5,500. Any
new financing should be obtained by issuing new longâterm debt. Anyexcess funds
should be held in cash
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