ff assignment

7/24/2019 FF Assignment

http://slidepdf.com/reader/full/ff-assignment 1/8

Solutions Guide: This is meant as a solutions guide. Please try reworking the

questions and reword the answers to essay type parts so as to guarantee that your

answer is an original. Do not submit as your own.

4-9.!"inan#ial $ore#asting%dis#retionary $inan#ing needed& The most re#ent balan#e

sheet $or the rmadillo Dog 'is#uit (o. is shown in the $ollowing table. The

#ompany is about to embark on an ad)ertising #ampaign* whi#h is e+pe#ted to raise

sales $rom the #urrent le)el o$ , million to , million by the end o$ ne+t year. The

$irm is #urrently operating at $ull #apa#ity and will ha)e to in#rease its in)estment in

both #urrent and $i+ed assets to support the pro/e#ted le)el o$ new sales. 0n $a#t* the

$irm estimates that both #ategories o$ assets will rise in dire#t proportion to the

pro/e#ted in#rease in sales.

rmadillo Dog 'is#uit (o.* 0n#. !, millions&

P12S23T 252 P21(23T 6" S2S P1672(T2D 252

(urrent assets ,8.3et $i+ed assets .

; Total ,.

##ounts payable ,.

##rued e+penses .

3otes payable <

; (urrent liabilities ,=.

ong-term debt ,8.

(ommon sto#k .

1etained earnings =.

(ommon equity ,8.

; Total ,.

The $irm>s net pro$its were ? per#ent o$ #urrent year>s sales but are e+pe#ted to rise

to per#ent o$ ne+t year>s sales. To help support its anti#ipated growth in asset

needs ne+t year* the $irm has suspended plans to pay #ash di)idends to its

sto#kholders. 0n past years* a ,=. per share di)idend has been paid annually.

rmadillo>s payables and a##rued e+penses are e+pe#ted to )ary dire#tly with sales.

0n addition* notes payable will be used to supply the $unds that are needed to $inan#e

ne+t year>s operations and that are not $orth#oming $rom other sour#es.

=. "ill in the table and pro/e#t the $irm>s needs $or dis#retionary $inan#ing. @se notes

payable as the balan#ing entry $or $uture dis#retionary $inan#ing needed.

8. (ompare rmadillo>s #urrent ratio and debt ratio !total liabilitiesAtotal assets&

be$ore the growth in sales and a$ter. Bhat was the e$$e#t o$ the e+panded sales on

these two dimensions o$ rmadillo>s $inan#ial #onditionC

. Bhat di$$eren#e* i$ any* would ha)e resulted i$ rmadillo>s sales had risen to ,?

million in one year and , million only a$ter two yearsC Dis#uss only no #al#ulations

are required.



(a) Estimating Future Financing NeedsArmadillo Dog Biscuit Co., Inc.

Projected Need for Discretionary Financing

Present of !ales Projected "e#el "e#el ($%m) (Based on $&m !ales)

Current Assets $'.m .* or * .* + $&m $ '.m Net Fi+ed Assets $-.m . or . + $&m $ *.'m

/otal $%.m $ &.m

Accounts Paya0le $.%m .1 or 1 .1 + &m .&m

Accrued E+2enses $.%m .1 or 1 .1 + &m .&m

Notes Paya0le

1

333333 33333 Plug Figure 1.11mCurrent "ia0ilities $1.m $ '.%1m"ong3/erm De0t $'.m No C4ange $'.mCommon !toc5 .%m No C4ange .%m6etained Earnings ' 1.%m $1.%m 7 .& + $&m $ 1.88mCommon E9uity $'.m $'.*8m

/otal $%.m $ &.m1

Notes 2aya0le is a 0alancing figure :4ic4 e9uals discretionary financing needed, DFN, :4ic4 e9uals; /otal

Assets 3 Accounts Paya0le 3 Accrued E+2enses 3 "ong3/erm De0t 3 Common !toc5 3 6etained Earnings $&.m 3 $.&m 3 $.&m 3 $'.m 3 $.%m 3 $1.88m $1.11m.

'/4e 2rojected retained earnings is t4e sum of t4e 0eginning 0alance of $1.%m 2lus net income for t4e 2eriod

(.& + $&m).

(0) Before AfterCurrent 6atio ' times 1.1' timesDe0t 6atio . or .** or *.*

/4e gro:t4 in t4e firm<s assets (due to t4e 2rojected increase in sales) :asfinanced 2redominantly :it4 notes 2aya0le (a current lia0ility). /4is ledto a su0stantial deterioration in 0ot4 t4e firm<s li9uidity (as reflected in t4ecurrent ratio) and an increase in its use of financial le#erage.

!#& /4e slo:er rate of gro:t4 in sales :ould 4a#e allo:ed Armadillo to finance a

larger 2ortion of t4e funds needed using retained earnings. For e+am2le,using t4e & 2ercent net 2rofit margin Armadillo :ould 4a#e .& + $m $*', it could rein#est after one3year<s o2erations 2lus .& + $& million $*8, from t4e second year<s sales. /4e total amount of retained earningso#er t4e t:o years t4en :ould 0e $81, rat4er t4an only $*8, as 0efore. /4is :ould mean t4at notes 2aya0le :ould 0e $-, after oneyear, and only $1.11m 3 .*'m $8, at t4e end of t4e second year. /4eresulting le#el of current lia0ilities :ould 0e $'.8m. /4us, t4e 2ost sales



gro:t4 current ratio after t:o years :ould 0e 1.-* ($'.m='.8m 1.-*)com2ared to 1.1' :it4 a one3year gro:t4 2eriod. /4e de0t ratio under t4et:o3year gro:t4 2eriod :ill 0e only % com2ared to a22ro+imately *:it4 t4e single year gro:t4 2eriod. /4e slo:er gro:t4 2ace :ould allo: t4efirm to e+2and its assets more gradually, t4us re9uiring less e+ternal financing

since more earnings can 0e retained.

-.

!(ompound )alue sol)ing $or i& t what annual rate would the $ollowing

ha)e to be in)estedC

=. , to grow to ,=*94E. in =8 years

8. , to grow to ,488.= in years

. , to grow to ,8E.8 in 8 years

4. ,8 to grow to ,49.? in years

(a) F>n P> (1 7 i)n

$1,8* $% (1 7 i)1'

-.8 F>IF i, 1' yr.

/4us, i =8F !be#ause the ppendi+ ' )alue o$ .E9?

o##urs in the =8 year row in the =8 per#ent

#olumn&

(0) F>n P> (1 7 i)n

$*''.1 $- (1 7 i)&

1.*& F>IFi, & yr./4us, i F

(c) F>n P> (1 7 i)n

$'.' $% (1 7 i)'

%.* F>IF i, ' yr.

/4us, i 9F

(d) F>n P> (1 7 i)n

$*8&. $' (1 7 i)%

F>IFi, % yr.

/4us, i 8F



-4.

!Present )alue& Bhat is the present )alue o$ the $ollowing $uture amountsC

=. ,E to be re#ei)ed = years $rom now dis#ounted ba#k to the present at =

per#ent

8. , to be re#ei)ed years $rom now dis#ounted ba#k to the present at

per#ent. ,=* to be re#ei)ed E years $rom now dis#ounted ba#k to the present at

per#ent

4. ,=* to be re#ei)ed E years $rom now dis#ounted ba#k to the present at

8 per#ent

(a) P> F>n

P> $

P> $ (.-)

P> ,E.E

(0) P> F>n

P> $-

P> $- (.&*)

P> ,8.8

(c) P> F>n

P> $1,

P> $1, (.&8)P> ,E9

(d) P> F>n

P> $1,

P> $1, (.'--)

P> ,8

-.!(ompound annuity& Bhat is the a##umulated sum o$ ea#h o$ the $ollowing

streams o$ paymentsC

=. , a year $or = years #ompounded annually at per#ent

8. ,= a year $or years #ompounded annually at = per#ent

. , a year $or years #ompounded annually at per#ent

4. ,8 a year $or years #ompounded annually at 8 per#ent



(a) F>n P?/

+∑

−

=

1n

t

ti)(1

F>1 $%

+∑

−

=

11

t

t.%)(1

F>1 $% (1'.%&)

F>1 ,?*8E9

(0) F>n P?/

+∑

−

=

t1n

t

i)(1

F>% $1

+∑

−

=

t1%

t

.1)(1

F>% $1 (.1%)

F>% ?=.

(c) F>n P?/

+∑

−

=

t1n

t

i)(1

F>& $-%

+∑

−

=

t1&

t

.&)(1

F>& $-% (.%*)

F>& ,8.E9

(d) F>n P?/

+∑−=

t1n

t

i)(1

F>- $'%

+∑

−

=

t .')(1 1-

t

F>- $'% (-.)F>- ,?.

-?.

!Present )alue o$ an annuity& Bhat is the present )alue o$ the $ollowingannuitiesC

=. ,8* a year $or = years dis#ounted ba#k to the present at per#ent

8. , a year $or years dis#ounted ba#k to the present at per#ent

. ,8E a year $or years dis#ounted ba#k to the present at ? per#ent

4. , a year $or = years dis#ounted ba#k to the present at = per#ent



(a) P> P?/

+∑=

t

n

1t i)(1

1

P> $',%

+∑=

t

1

1t .&)(1

1

P> $',% (&.'*)

P> ,=*?

(0) P> P?/

+∑=

t

n

1t i)(1

1

P> $&

+∑

=t

-

1t .-)(1

1

P> $& ('.'8)

P> ,=9E.

(c) P> P?/

+∑=

t

n

1t i)(1

1

P> $'

+∑=

t

&

1t .)(1

1

P> $' (%.%')

P> ,=*?8.9?

(d) P> P?/

+∑=

t

n

1t i)(1

1

P> $%

+∑=

t

1

1t .1)(1

1

P> $% (.1*%)

P> ,*8.

-9.!(ompound interest with nonannual periods&

=. (al#ulate the $uture sum o$ ,** gi)en that it will be held in the bank $i)e

years at an annual interest rate o$ ? per#ent.

8. 1e#al#ulate part !a& using a #ompounding period that is !=& semiannual and

!8& bimonthly.

. 1e#al#ulate parts !a& and !b& $or a =8 per#ent annual interest rate.

4. 1e#al#ulate part !a& using a time horion o$ =8 years !annual interest rate is



still ? per#ent&.

. Bith respe#t to the e$$e#t o$ #hanges in the stated interest rate and holding

periods on $uture sums in parts !#& and !d&* what #on#lusions do you draw when

you #ompare these $igures with the answers $ound in parts !a& and !b&C

(a) F>n P> (1 7 i)n

F>% $%, (1 7 .)%

F>% $%, (1.--)

F>% ,?*?9

(0) F>n P> (1 7 )mn

F>% $%, (1 7 )'@%

F>% $%, (1 7 .-)1

F>% $%, (1.-**)

F>% $,&'

F>n P> (1 7 )mn

F>% %, (1 7 )@%

F>% $%, (1 7 .1)-

F>% $%, (1.-*)

F>% ,?*4

(c) F>n P> (1 7 i)n

F>% $%, (1 7 .1')

%

F>% $%, (1.&')F>% $,1

F>% P>mn

F>% $%,'@%

F>% $%, (1 7 .)1

F>% $%, (1.&81)

F>% $,8%%

F>% P> mn



F>% $%, @%

F>% $%, (1 7 .')-

F>% $%, (1.11)

F>% H ,9*

(d) F>n P> (1 7 i)n

F>1' $%, (1 7 .)1'

F>1' %, ('.1')

F>1' H ,=*?

(e) An increase in t4e stated interest rate :ill increase t4e future #alue of agi#en sum. "i5e:ise, an increase in t4e lengt4 of t4e 4olding 2eriod :illincrease t4e future #alue of a gi#en sum.

-=4.

!Sol)ing $or PIT in an annuity& To pay $or your #hild>s edu#ation* you wish to

ha)e a##umulated ,=* at the end o$ = years. To do this* you plan to deposit

an equal amount into the bank at the end o$ ea#h year. 0$ the bank is willing to

pay ? per#ent #ompounded annually* how mu#h must you deposit ea#h year to

obtain your goalC

F>n P?/

+∑

−

=

t1n

t

i)(1

$1%, P?/

+∑−

=

t11%

t

.)(1

$1%, P?/ ('-.'&)

Thus* PIT H ,?44.44

ff assignment

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