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Date Submitted: 09/29/2015 10:16 PM
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 (...