4-9A.
(Financial forecasting—discretionary financing needed) The most recent balance sheet for the Armadillo Dog Biscuit Co. is shown in the following table. The company is about to embark on an advertising campaign, which is expected to raise sales from the current level of $5 million to $7 million by the end of next year. The firm is currently operating at full capacity and will have to increase its investment in both current and fixed assets to support the projected level of new sales. In fact, the firm estimates that both categories of assets will rise in direct proportion to the projected increase in sales.
Armadillo Dog Biscuit Co., Inc. ($ millions)
PRESENT LEVEL PERCENT OF SALES PROJECTED LEVEL
Current assets $2.0
Net fixed assets 3.0
• Total $5.0
Accounts payable $0.5
Accrued expenses 0.5
Notes payable –
• Current liabilities $1.0
Long-term debt $2.0
Common stock 0.5
Retained earnings 1.5
Common equity $2.0
• Total $5.0
The firm's net profits were 6 percent of current year's sales but are expected to rise to 7 percent of next year's sales. To help support its anticipated growth in asset needs next year, the firm has suspended plans to pay cash dividends to its stockholders. In past years, a $1.50 per share dividend has been paid annually.
Armadillo's payables and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds that are needed to finance next year's operations and that are not forthcoming from other sources.
1. Fill in the table and project the firm's needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needed.
2. Compare Armadillo's current ratio and debt ratio (total liabilities/total assets) before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of Armadillo's financial condition?
3. What difference, if any, would have resulted if Armadillo's sales had risen to $6 million in one year and $7 million only after two years? Discuss only; no calculations are required.
(c) 5-3A.
(Compound value solving for i) At what annual rate would the following have to be invested?
1. $500 to grow to $1,948.00 in 12 years
2. $300 to grow to $422.10 in 7 years
3. $50 to grow to $280.20 in 20 years
4. $200 to grow to $497.60 in 5 years
5-4A.
(Present value) What is the present value of the following future amounts?
1. $800 to be received 10 years from now discounted back to the present at 10 percent
2. $300 to be received 5 years from now discounted back to the present at 5 percent
3. $1,000 to be received 8 years from now discounted back to the present at 3 percent
4. $1,000 to be received 8 years from now discounted back to the present at 20 percent
5-5A.
(Compound annuity) What is the accumulated sum of each of the following streams of payments?
1. $500 a year for 10 years compounded annually at 5 percent
2. $100 a year for 5 years compounded annually at 10 percent
3. $35 a year for 7 years compounded annually at 7 percent
4. $25 a year for 3 years compounded annually at 2 percent
5-6A.
(Present value of an annuity) What is the present value of the following annuities?
1. $2,500 a year for 10 years discounted back to the present at 7 percent
2. $70 a year for 3 years discounted back to the present at 3 percent
3. $280 a year for 7 years discounted back to the present at 6 percent
4. $500 a year for 10 years discounted back to the present at 10 percent
5-9A.
(Compound interest with nonannual periods)
1. Calculate the future sum of $5,000, given that it will be held in the bank five years at an annual interest rate of 6 percent.
2. Recalculate part (a) using a compounding period that is (1) semiannual and (2) bimonthly.
3. Recalculate parts (a) and (b) for a 12 percent annual interest rate.
4. Recalculate part (a) using a time horizon of 12 years (annual interest rate is still 6 percent).
5. With respect to the effect of changes in the stated interest rate and holding periods on future sums in parts (c) and (d), what conclusions do you draw when you compare these figures with the answers found in parts (a) and (b)?
5-14A.
(Solving for PMT in an annuity) To pay for your child's education, you wish to have accumulated $15,000 at the end of 15 years. To do this, you plan to deposit an equal amount into the bank at the end of each year. If the bank is willing to pay 6 percent compounded annually, how much must you deposit each year to obtain your goal?
(Financial forecasting—discretionary financing needed) The most recent balance sheet for the Armadillo Dog Biscuit Co. is shown in the following table. The company is about to embark on an advertising campaign, which is expected to raise sales from the current level of $5 million to $7 million by the end of next year. The firm is currently operating at full capacity and will have to increase its investment in both current and fixed assets to support the projected level of new sales. In fact, the firm estimates that both categories of assets will rise in direct proportion to the projected increase in sales.
Armadillo Dog Biscuit Co., Inc. ($ millions)
PRESENT LEVEL PERCENT OF SALES PROJECTED LEVEL
Current assets $2.0
Net fixed assets 3.0
• Total $5.0
Accounts payable $0.5
Accrued expenses 0.5
Notes payable –
• Current liabilities $1.0
Long-term debt $2.0
Common stock 0.5
Retained earnings 1.5
Common equity $2.0
• Total $5.0
The firm's net profits were 6 percent of current year's sales but are expected to rise to 7 percent of next year's sales. To help support its anticipated growth in asset needs next year, the firm has suspended plans to pay cash dividends to its stockholders. In past years, a $1.50 per share dividend has been paid annually.
Armadillo's payables and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds that are needed to finance next year's operations and that are not forthcoming from other sources.
1. Fill in the table and project the firm's needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needed.
2. Compare Armadillo's current ratio and debt ratio (total liabilities/total assets) before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of Armadillo's financial condition?
3. What difference, if any, would have resulted if Armadillo's sales had risen to $6 million in one year and $7 million only after two years? Discuss only; no calculations are required.
(c) 5-3A.
(Compound value solving for i) At what annual rate would the following have to be invested?
1. $500 to grow to $1,948.00 in 12 years
2. $300 to grow to $422.10 in 7 years
3. $50 to grow to $280.20 in 20 years
4. $200 to grow to $497.60 in 5 years
5-4A.
(Present value) What is the present value of the following future amounts?
1. $800 to be received 10 years from now discounted back to the present at 10 percent
2. $300 to be received 5 years from now discounted back to the present at 5 percent
3. $1,000 to be received 8 years from now discounted back to the present at 3 percent
4. $1,000 to be received 8 years from now discounted back to the present at 20 percent
5-5A.
(Compound annuity) What is the accumulated sum of each of the following streams of payments?
1. $500 a year for 10 years compounded annually at 5 percent
2. $100 a year for 5 years compounded annually at 10 percent
3. $35 a year for 7 years compounded annually at 7 percent
4. $25 a year for 3 years compounded annually at 2 percent
5-6A.
(Present value of an annuity) What is the present value of the following annuities?
1. $2,500 a year for 10 years discounted back to the present at 7 percent
2. $70 a year for 3 years discounted back to the present at 3 percent
3. $280 a year for 7 years discounted back to the present at 6 percent
4. $500 a year for 10 years discounted back to the present at 10 percent
5-9A.
(Compound interest with nonannual periods)
1. Calculate the future sum of $5,000, given that it will be held in the bank five years at an annual interest rate of 6 percent.
2. Recalculate part (a) using a compounding period that is (1) semiannual and (2) bimonthly.
3. Recalculate parts (a) and (b) for a 12 percent annual interest rate.
4. Recalculate part (a) using a time horizon of 12 years (annual interest rate is still 6 percent).
5. With respect to the effect of changes in the stated interest rate and holding periods on future sums in parts (c) and (d), what conclusions do you draw when you compare these figures with the answers found in parts (a) and (b)?
5-14A.
(Solving for PMT in an annuity) To pay for your child's education, you wish to have accumulated $15,000 at the end of 15 years. To do this, you plan to deposit an equal amount into the bank at the end of each year. If the bank is willing to pay 6 percent compounded annually, how much must you deposit each year to obtain your goal?
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