Week 2 Tutorial Problems

9-3 AFN = (0.625)($1,200,000) – (0.1125)($1,200,000) – 0.06($9,200,000)(1 – 0)

= $750,000 – $135,000 – $552,000
= $63,000.

Under this scenario the company would have a higher level of retained earnings
which would reduce the amount of additional funds needed.

9-4 S0 = $5,000,000; A0* = $2,500,000; CL = $700,000; NP = $300,000; AP = $500,000;

Accruals = $200,000; M = 7%; payout ratio = 80%; A0*/S0 = 0.50; L0* = (AP + Accruals)/S0
= ($500,000 + $200,000)/$5,000,000 = 0.14.

AFN = (A0*/S0)∆S – (L0*/S0)∆S – (M)(S1)(1 – payout rate)

= (0.50)∆S – (0.14) ∆S – (0.07)(S1)(1 – 0.8)
= (0.50)∆S – (0.14)∆S – (0.014)S1
= (0.36)∆S – (0.014)S1
= 0.36(S1 – S0) – (0.014)S1
= 0.36(S1 – $5,000,000) – (0.014)S1
= 0.36S1 – $1,800,000 – 0.014S1
$1,800,000 = 0.346S1
$5,202,312 = S1.

Sales can increase by $5,202,312 – $5,000,000 = $202,312 without additional funds

being needed.

9-5 a. Total liab. = Accounts + Long-term + Common + Retained

and equity payable debt stock earnings
$2,170,000 = $560,000 + Long-term debt + $625,000 + $395,000

Long-term debt = $590,000.

Total liab. = Accounts payable + Long-term debt

= $560,000 + $590,000 = $1,150,000.

b. Assets/Sales (A0*/S0) = $2,170,000/$3,500,000 = 62%.

L0*/Sales = $560,000/$3,500,000 = 16%.
2019 Sales = (1.35)($3,500,000) = $4,725,000.
 AFN = (A0*/S0)(∆S) – (L0*/S0)(∆S) – (M)(S1)(1 – payout) – New common stock
= (0.62)($1,225,000) - (0.16)($1,225,000) - (0.05)($4,725,000)(0.55) - $195,000
= $759,500 - $196,000 - $129,937 - $195,000 = $238,563.

Alternatively, using the forecasted financial statement method:

Forecast Additions
basis is % (New
of 2018 Financing and
2018 Sales ΔRE) 2019
Sales $3.500,000 $4,725,000

Total assets $2,170,000 0.62 $2,929,500

Current liabilities $ 560,000 0.16 $ 756,000

Preliminary long-term debt 590,000 590,000
Total liabilities $1,150,000 $1,346,000
Common stock 625,000 195,000* 820,000
Retained earnings 395,000 129,937** 524,937
Total common equity $1,020,000 $1,344,937
Preliminary total liabilities and equity $2,170,000 $2,690,937

AFN = Total assets – Preliminary total liabilities & equity = S2,929,500 – 2,690,937 = $238,563
AFN = Additional required long-term debt =$238,563

*Given in problem that firm will sell new common stock = $195,000.
**PM = 5%; Payout = 45%; NI2019 = $3,500,000 x 1.35 x 0.05 = $236,250.
Addition to RE = NI x (1 - Payout) = $236,250 x 0.33 = $129,937.

9-7 a. AFN = (A0*/S0)(S) – (L0*/S0)(S) – (M)(S1)(1 – payout)

$122.5 $17.5 $10.5
= ($70) – ($70) – ($420)(0.6) = $13.44 million.
$350 $350 $350

M (1 − POR )(S 0 )
b. Self-supporting g =
A 0 * − L 0 * − M (1 − POR )(S 0 )

0.03(1 − 0.40 )( 350 )

=
122 .5 − 17.5 − .03(1 − .4)( 350 )

= 6.38%
 c. Upton Computers
Pro Forma Balance Sheet
December 31, 2019
(Millions of Dollars)

Forecast
Basis:
Percent of 2019 Pro
forecasted 2019 Pro Forma after
2018 sales Additions Forma Financing Financing
Cash $ 3.5 0.0100 $ 4.20 $ 4.20
Receivables 26.0 0.0743 31.20 31.20
Inventories 58.0 0.1657 69.60 69.60
Total current assets $ 87.5 $105.00 $105.00
Net fixed assets 35.0 0.100 42.00 42.00
Total assets $122.5 $147.00 $147.00

Accounts payable $ 9.0 0.0257 $ 10.80 $ 10.80

Notes payable 18.0 18.00 18.00
Line of credit 0.0 0.00 +13.44 +13.44
Accruals 8.5 0.0243 10.20 10.20
Total current liabilities $ 35.5 $ 39.00 $ 52.44
Mortgage loan 6.0 6.00 6.00
Common stock 15.0 15.00 15.00
Retained earnings 66.0 7.56 73.56 73.56
Total liab. and equity $122.5 $133.56 $147.00
Deficit = $ 13.44

Forecasted sales = $420 million

Profit margin = M = $10.5/$350 = 3%.
Payout ratio = $4.2/$10.5 = 40%.
NI = Forecasted sales  Profit margin = $350  1.2  0.03 = $12.6.
Dividends = NI(Payout ratio) = $12.6(40%) = $5.04.
Addition to RE = NI – DIV = $12.6 – $5.04 = $7.56.

The additional investment in assets is equal to the change in total assets because there
are not short-term investments:

Additional investments in assets = $147.0 − $122.5 = $24.5

The additional financing from the increase in spontaneous liabilities and from the
reinvested earnings is:

Additional financing = [($10.8 + $10.2) – ($9.0 + $8.5)] + $7.56

= $3.5 + $7.56 = $11.06

Financing surplus (deficit) = Additional financing – Additional assets

= $11.06 − $24.5 = −$13.44

Because this is negative, it is a financing deficit. This means the LOC should be $13.44.