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that net assets (Assets − Liabilities) will represent 45 percent of sales. His firm has an 10 percent return on sales and pays 35 percent of profits out as dividends.
a. What effect will this growth have on funds?
The cash balance will be?
b. If the dividend payout is only 15 percent, what effect will this growth have on funds?
The cash balance will be?
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Question
average.
The firm is expecting a 30 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.
| Income Statement | ||
| Sales | $ | 200,000 |
| Expenses | 149,600 | |
| Earnings before interest and taxes | $ | 50,400 |
| Interest | 9,200 | |
| Earnings before taxes | $ | 41,200 |
| Taxes | 17,200 | |
| Earnings after taxes | $ | 24,000 |
| Dividends | $ | 6,000 |
| Balance Sheet | |||||
| Assets | Liabilities and Stockholders’ Equity | ||||
| Cash | $ | 6,000 | Accounts payable | $ | 22,900 |
| Accounts receivable | 55,000 | Accrued wages | 2,300 | ||
| Inventory | 69,000 | Accrued taxes | 4,800 | ||
| Current assets | $ | 130,000 | Current liabilities | $ | 30,000 |
| Fixed assets | 87,000 | Notes payable | 9,200 | ||
| Long-term debt | 26,000 | ||||
| Common stock | 126,000 | ||||
| Retained earnings | 25,800 | ||||
| Total assets | $ | 217,000 | Total liabilities and stockholders’ equity | $ | 217,000 |
Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)
The Firm ? ? ?
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Question
| TIMES MIRROR AND GLASS Co. Income Statement | ||
| Sales | $ | 255,000 |
| Cost of goods sold | 167,000 | |
| Gross profit | $ | 88,000 |
| Selling and administrative expense | 40,600 | |
| Lease expense | 15,800 | |
| Operating profit* | $ | 31,600 |
| Interest expense | 7,700 | |
| Earnings before taxes | $ | 23,900 |
| Taxes (30%) | 9,560 | |
| Earnings after taxes | $ | 14,340 |
| *Equals income before interest and taxes. |
a.Compute the interest coverage ratio. (Round your answer to 2 decimal places.)
Interest Covered ? times
b.Compute the fixed charge coverage ratio. (Round your answer to 2 decimal places.)
The total assets for this company equal $169,000. Set up the equation for the Du Pont system of ratio analysis.
c.Compute the profit margin ratio. (Input your answer as a percent rounded to 2 decimal places.)
d.Compute the total asset turnover ratio. (Round your answer to 2 decimal places.)
e. Compute the return on assets (investment). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
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