Loan Preserver

Chapter 4

SOLUTIONS TO END-OF-CHAPTER PROBLEMS

4-1 AFN = (A*/S0)(S - (L*/S0)(S - MS1(RR)

= [pic]$1,000,000 - [pic]$1,000,000

- 0.05($6,000,000)(0.3)

= (0.6)($1,000,000) - (0.1)($1,000,000) - ($300,000)(0.3)

= $600,000 - $100,000 - $90,000

= $410,000.

4-2 AFN = [pic]

= (0.8)($1,000,000) - $100,000 - $90,000

= $800,000 - $190,000

= $610,000.

The capital intensity ratio is measured as A*/S0. This firm’s capital intensity ratio is higher than that of the firm in Problem 4-1; therefore, this firm is more capital intensive--it would require a large increase in total assets to support the increase in sales.

4-3 AFN = (0.6)($1,000,000) - (0.1)($1,000,000) - 0.05($6,000,000)(1)

= $600,000 - $100,000 - $300,000

= $200,000.

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

4-4 a. [pic] = [pic].

$1,200,000 = $375,000 + Long-term debt + $425,000 + $295,000

Long-term debt = $105,000.

Total debt = Accounts payable + Long-term debt

= $375,000 + $105,000 = $480,000.

Alternatively,

Total debt = [pic] - Common stock – Retained earnings

= $1,200,000 - $425,000 - $295,000 = $480,000.

b. Assets/Sales (A*/S0) = $1,200,000/$2,500,000 = 48%.

L*/Sales (L*/S0) = $375,000/$2,500,000 = 15%.

2001 Sales = (1.25)($2,500,000) = $3,125,000.

AFN = (A*/S0)((S) - (L*/S0)((S) - MS1(RR) - New common stock

= (0.48)($625,000) - (0.15)($625,000)

- (0.06)($3,125,000)(0.6) - $75,000

= $300,000 - $93,750 - $112,500 - $75,000 = $18,750.

Alternatively, using the percent of sales method:

Forecast

Basis (...