Question 1

A firm has net income of $32,000 on sales of $190,000. Sales are expected to increase by 6% next year and the dividend payout ratio is 35%. The firm uses the percentage of sales approach when compiling pro forma statements. What amount is expected to be added to retained earnings next year?

Accepted Answer

The answer of A firm has net income of $32,000...

Question 2

Zonvier, Inc., has sales of $53,800, a profit margin of 10.5%, and a plowback ratio of 40%. The company has 15,000 shares of stock outstanding. The firm uses the percentage of sales method for pro forma statements and estimates next year's sales will increase by 15%. What is the dividend per share expected to be next year?

Accepted Answer

First, we need to calculate the net income for next year using the information given:

Net Income = Sales x Profit Margin x (1 - Plowback Ratio)
Net Income = $53,800 x 0.105 x (1 - 0.40)
Net Income = $2,707

Next, we need to calculate the dividends to be paid out using the dividends paid out for the current year:

Dividends = Net Income x (1 - Plowback Ratio) / Number of Shares
Dividends = $2,707 x (1 - 0.40) / 15,000
Dividends = $0.07218

Finally, we can use the percentage of sales method to estimate the dividend per share for next year:

Dividend per Share = Dividends / (1 + Sales Increase Rate)
Dividend per Share = $0.07218 / (1 + 0.15)
Dividend per Share = $0.06280

Therefore, the closest answer choice is C) $.260.

Question 3

What is the financing cash flow, given the following information?
$\begin{array}{lrr}
  \text {  Net income} &\$800\
 \text {Depreciation  } &\$130\
 \text {  Issuance of new stock} &\$60\
 \text { Repayment of long-term debt } &\$80\
 \text {Sale of old equipment  } &\$50\
 \text {  Purchase of new equipment} &\$70\
 \text {  Dividend payments} &\$30\
 \text {  Interest payments} &\$90\
\end{array}$

Accepted Answer

The answer of What is the financing cash flow, given...

Question 4

A firm has the following account balances for this year. Sales for the year are $500,000. Projected sales for next year are $545,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $5,000 next year. Retained earnings is expected to increase by $3,500 next year. What is the projected external financing need?
$\begin{array}{lrr}
  \text {Current assets  } &\$48,000\
 \text { Net fixed assets } &\$158,000\
 \text { Current liabilities } &\$48,000\
 \text { Long-term debt } &\$83,000\
 \text {  common stock} &\$36,000\
 \text { Retained earnings } &\$40,000\
\end{array}$

Accepted Answer

The projected external financing need is calculated by first determining the total financing needed for the projected increase in assets and then subtracting the internal financing available through retained earnings and the reduction in long-term debt.1. Calculate the percentage increase in sales: $(545,000 - 500,000) / 500,000 = 0.09$ or 9%.2. Apply this percentage to all balance sheet accounts that change with sales (current assets and net fixed assets):   - Current assets will increase by $48,000 \times 0.09 = 4,320$.   - Net fixed assets will increase by $158,000 \times 0.09 = 14,220$.3. The total increase in assets is $4,320 + 14,220 = 18,540$.4. Current liabilities are expected to increase by the same percentage as sales because they change with sales: $48,000 \times 0.09 = 4,320$.5. The total financing needed is the increase in assets minus the increase in current liabilities: $18,540 - 4,320 = 14,220$.6. Subtract the internal financing available:   - Reduction in long-term debt: $5,000$.   - Increase in retained earnings: $3,500$.7. The total internal financing is $5,000 + 3,500 = 8,500$.8. The projected external financing need is the total financing needed minus the internal financing: $14,220 - 8,500 = 5,720$.It appears there was a mistake in my calculations. Let's correct the approach:1. Calculate the total assets for next year: Current assets and net fixed assets will increase by 9%, so:   - Projected current assets: $48,000 \times 1.09 = 52,320$.   - Projected net fixed assets: $158,000 \times 1.09 = 172,220$.   - Total projected assets: $52,320 + 172,220 = 224,540$.2. Calculate the total liabilities and equity for next year, excluding long-term debt and common stock since they do not change with sales:   - Current liabilities will increase by 9%: $48,000 \times 1.09 = 52,320$.   - Long-term debt will decrease by $5,000: $83,000 - 5,000 = 78,000$.   - Retained earnings will increase by $3,500: $40,000 + 3,500 = 43,500$.   - Total projected liabilities and equity without common stock: $52,320 + 78,000 + 43,500 = 173,820$.3. Add the unchanged common stock: $173,820 + 36,000 = 209,820$.4. The difference between total projected assets and total projected liabilities and equity is the external financing need: $224,540 - 209,820 = 14,720$.Therefore, the correct projected external financing need is $14,720, which corresponds to option B.

Question 5

For the year, Wilson Manufacturing, Inc., increased its current assets by $62,000, decreased its current liabilities by $55,000, and decreased its fixed assets by $19,000. What is the investment cash flow for the year?

Accepted Answer

The investment cash flow for the year can be calculated by subtracting the increase in current assets and the decrease in current liabilities from the decrease in fixed assets. Therefore:

Investment Cash Flow = Decrease in Fixed Assets - Increase in Current Assets - Decrease in Current Liabilities
Investment Cash Flow = -$19,000 - $62,000 + $55,000
Investment Cash Flow = -$26,000

However, the question is asking for the absolute value of the investment cash flow, which is $26,000. Since the cash flow is negative, indicating an outflow of cash, the answer should be presented as a negative value in the format provided. Therefore, the best choice is C, as it is the only option that provides the correct value and presents it in the appropriate format.

Question 6

A firm has the following account balances for this year. Sales for the year are $420,000. Projected sales for next year are $441,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $23,500 next year. Retained earnings is expected to increase by $5,400 next year. What is the projected external financing need?
$\begin{array}{lrr}
  \text {Current assets  } &\$48,000\
 \text {Net fixed assets  } &\$270,000\
 \text {Current liabilities  } \$56,000&\
 \text {Long-term debt  } &\$154,000\
 \text { Common stock } &\$50,000\
 \text { Retained earnings } &\$91,000\
\end{array}$

Accepted Answer

The answer of A firm has the following account balances...

Question 7

A company has the following account balances. How much cash does the firm have assuming there are no other accounts?
$\begin{array}{ll}
\text { Inventory } & \$ 22,500 \
\text { Total Equity } & \$ 98,800 \
\text { Accounts Receivable } & \$ 20,200 \
\text { Fixed assets } & \$ 78,300 \
\text { Accounts payable } & \$ 19,100 \
\text { Long-term debt } & \$ 34,000
\end{array}$

Accepted Answer

The answer of A company has the following account balances....

Question 8

Last year, a firm had net income of $508,000 on sales of $1,250,000. The projected sales for next year are $1,450,000. Assume the firm uses the percentage of sales method for pro forma statements. What is the projected net income?

Accepted Answer

The net income is projected using the percentage of sales method. The net income margin from last year is calculated as $508,000 / $1,250,000 = 0.4064 or 40.64%. Applying this percentage to the projected sales of $1,450,000 gives a projected net income of 0.4064 * $1,450,000 = $589,280.

Question 9

A firm has $4,500 of cash, equipment worth $42,000, inventory of $16,700, patents worth $12,200, and $15,600 of accounts receivable. What is the value of the total current assets?

Accepted Answer

The answer of A firm has $4,500 of cash, equipment...

Question 10

What is the operating cash flow, given the following information?
$\begin{array}{lrr}
  \text {  Net income} &\$825\
 \text {Depreciation  } &\$65\
 \text {  Issuance of new stock} &\$20\
 \text { Repayment of long-term debt } &\$35\
 \text {Sale of old equipment  } &\$40\
 \text {  Purchase of new equipment} &\$60\
 \text {  Dividend payments} &\$55\
 \text {  Interest payments} &\$80\
\end{array}$

Accepted Answer

The answer of What is the operating cash flow, given...

Question 11

What is the financing cash flow, given the following information?
$\begin{array}{lrr}
  \text {  Net income} &\$550\
 \text {Depreciation  } &\$60\
 \text {  Issuance of new stock} &\$25\
 \text { Repayment of long-term debt } &\$30\
 \text {Sale of old equipment  } &\$45\
 \text {  Purchase of new equipment} &\$65\
 \text {  Dividend payments} &\$70\
 \text {  Interest payments} &\$100\
\end{array}$

Accepted Answer

Financing cash flow includes issuance of new stock, repayment of long-term debt, and dividend payments. Thus, it is calculated as: Issuance of new stock ($25) - Repayment of long-term debt ($30) - Dividend payments ($70) = $25 - $30 - $70 = -$75.

Question 12

What is the investment cash flow, given the following information?
$\begin{array}{lrr}
  \text {  Net income} &\$560\
 \text {Depreciation  } &\$50\
 \text {  Issuance of new stock} &\$35\
 \text { Repayment of long-term debt } &\$70\
 \text {Sale of old equipment  } &\$70\
 \text {  Purchase of new equipment} &\$80\
 \text {  Dividend payments} &\$75\
 \text {  Interest payments} &\$90\
\end{array}$

Accepted Answer

Investment cash flow includes cash flows from the purchase and sale of long-term assets. Here, it is calculated as the sale of old equipment ($70) minus the purchase of new equipment ($80), resulting in a net cash outflow of $10.

Question 13

Baker Jewelry, Inc., has annual sales of $5.2 million and a gross profit margin of 60%. The operating expenses are $489,000 and depreciation is $155,000. Interest expense is $70,000 and the tax rate is 21%. What is the net income?

Accepted Answer

The answer of Baker Jewelry, Inc., has annual sales of...

Question 14

What is the investment cash flow, given the following information?
$\begin{array}{lrr}
  \text {  Net income} &\$600\
 \text {Depreciation  } &\$70\
 \text {  Issuance of new stock} &\$30\
 \text { Repayment of long-term debt } &\$20\
 \text {Sale of old equipment  } &\$40\
 \text {  Purchase of new equipment} &\$60\
 \text {  Dividend payments} &\$70\
 \text {  Interest payments} &\$100\
\end{array}$

Accepted Answer

The answer of What is the investment cash flow, given...

Question 15

A firm has current sales of $42,000. Projected sales for next year are $44,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The expected increase in retained earnings is $2,500. What is the projected external financing need given the following current account values?
$\begin{array}{lrr}
\text { Current assets } & \$ 11,000 \
\text { Net fixed assets } & \$ 25,000 \
\text { Current liabilities } & \$  5,600 \
\text { Long-term debt } & \$  10,500 \
\text { Common stock } & \$  4,500 \
\text { Retained earnings } & \$  10,500
\end{array}$

Accepted Answer

The answer of A firm has current sales of $42,000....

Question 16

A firm has sales of $1,090,000 and cost of goods sold of $739,000. The firm expects sales to increase by 5% next year. What is the gross profit amount expected to be next year if the firm uses the percentage of sales approach when compiling pro forma statements?

Accepted Answer

The gross profit is calculated as sales minus cost of goods sold. With a 5% increase in sales, next year's sales are expected to be $1,090,000 * 1.05 = $1,144,500. Using the percentage of sales approach, if the cost of goods sold remains the same percentage of sales, it would also increase by 5% to $739,000 * 1.05 = $775,950. Therefore, the expected gross profit next year would be $1,144,500 - $775,950 = $368,550.

Question 17

Your company has pretax income of $52,000 on sales of $506,000. Sales are expected to increase by 6% next year and the tax rate is 21%. What is the expected net income for next year if your firm uses the percentage of sales approach when compiling pro forma statements?

Accepted Answer

The answer of Your company has pretax income of $52,000...

Question 18

What is the operating cash flow, given the following information?
$\begin{array}{lrr}
  \text { Net income } &\$745\
 \text {Depreciation  } &\$85\
 \text { Issuance of new stock } &\$35\
 \text {  Repayment of debt} &\$35\
 \text {  Sale of old equipment} &\$50\
 \text {Purchase of new equipment  } &\$85\
 \text {  Dividend payments} &\$80\
 \text {Interest payments  } &\$90\
\end{array}$

Accepted Answer

The answer of What is the operating cash flow, given...

Question 19

The Erie Bay Liner Company has sales of $2.4 million and operating expenses of $180,000. The firm uses the percentage of sales approach and estimates next year's sales at $2.5 million. What are the operating expenses expected to be next year?

Accepted Answer

Operating expenses are expected to be $187,500 next year because using the percentage of sales approach, the operating expenses as a percentage of sales for the current year are calculated as $180,000 / $2,400,000 = 7.5%. Applying this percentage to next year's sales of $2.5 million, the expected operating expenses are 7.5% of $2,500,000 = $187,500.

Question 20

The Corner Market had annual sales of $700,000 and total assets of $605,000. What is the return on assets if the profit margin is 8%?

Accepted Answer

Return on assets (ROA) is calculated as (Net Income / Total Assets). With a profit margin of 8%, the net income is 8% of $700,000, which is $56,000. Therefore, ROA = $56,000 / $605,000 = 9.26%.

Quiz 19: Projecting Cash Flow and Earnings