Week 3 Chapter 12 Solutions (All Questions Answered + Step by Step) | A+ work | Guaranteed - 25381

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Q12-3 The following is sometimes used to forecast financial requirements:


What key assumption do we make when using this equation?  Under what conditions might this assumption not hold true?


Q12-5 What is meant by the term “self supporting growth rate”?  How is this rate related to the AFN equation, and how can that equation be used to calculate the self supporting growth rate?


P12-3 Refer to Problem 12-1.  Return to the assumption that the company had $3million in assets at the end of 2010, but now assume that the company pays no dividends.  Under these assumptions, what would be the additional funds needed for the upcoming year?  Why is this AFN different from the one you found in Problem 12-1?


P12-5 At the year-end 2010, Bertin Inc’s total assets were $1.2 million and its account payable was $375,000.  Sales, which in 2010 were $2.5 million, are expected to increase by 25% in 2011.  Total assets and accounts payable are proportional to sales and that relationship will be maintained.  Bertin typically uses no current liabilities other than the accounts payable.  Common stock amounted to $425,000 in 2010, and retained earnings were $295,000.  Bertin has arranged to sell $75,000 of new common stocks in 2011 to meet some of its financing needs.  The remainder of its financing needs will be met by issuing new long term debt at the end of 2011.  (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.)  Its profit margin on sales is 6% and 40% of earnings will be paid out as dividends.

a. What were Bertin’s total long term debt and total liabilities in 2010?

b.  How much new longer debt financing will be needed in 2011?  (Hint:  AFN-New stock=New long term debt.)


P12-7 Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships thme to its chain of retail stores and has a staff to advise customers and help them set up their new computers. Upton’s balance sheet as of December 31, 2010 is shown here (millions of dollars):




Accounts payable





Notes Payable







Total current assets



Total current liabilities


Net fixed assets



Mortgage loan





Common stock





Retained earnings





Total liabilities and equity


Sales for 2010 were $350 million and net income for the year was $10.5 million, so the firm’s profit margin was 3.0%. Uptonpaid dividends of $4.2 million to common stock holders, so its payout ratio was 40%.  Its tax rate is 40% and it operated at full capacity.  Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin and the payout ratio remain constant in 2011.

  1. If sales are projected to increase by $70 million, or 20% during 2011, use the AFN equation to determineUpton’s projected external capital requirements.
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