Banker Company is looking to forecast the financing it will need for the next ye

Question

Banker Company is looking to forecast the financing it will need for the next year's operations. To do so, Banker must look at its financial statements to determine whether or not it will be able to sustain future sales. Below are some important facts and metrics extracted from the firm's financial statements:

Net Income: $5,000,000

Profit Margin: 25%

Roe: 10%

40% of the firm's assets can be liquidated within a calendar year

Of these assets, only 25% or comprised of inventory

Quick Ratio: 1.7

Debt-to-Equity Ratio: 0.75

85% of the firm's earnings are reinvested into the firm.

If the company expects sales to increase by 30%, then what is the extra financing needed for Banker in the coming year?

Explanation / Answer

Net Income: $5,000,000

Profit Margin: 25%

Roe: 10% = Net Income/Common equity

So Common equity = Net Income/10% = 5000000/10% =$50,000,000

Quick Ratio: 1.7 = (CA-Inventory)/CL

Debt-to-Equity Ratio: 0.75 = Debt/Equity

So Debt = 0.75*Equity = 0.75*$50,000,000 = $37,500,000

So Total Assets = Debt +Equity = 50,000,000 + 37,500,000 = 87,500,000

Profit margin = Net Inocme/Sales

So Sales S0 = Net Inocme/Profit mahgin = 5000000/25% = $20,000,000

SO S1 = S0*(1+30%) = 1.13*S0

40% of the firm's assets can be liquidated within a calendar year

Of these assets, only 25% or comprised of inventory

SO CA = 40%*TA = 40%*87500000 = $35,000,000

Inventory = 25%*CA = 25%*$35,000,000 = $8,750,000

As QR = 1.7= (CA-Inv)/CL

So Current Liability CL = (CA-INV)/1.7

= (35000000-8750000)/1.7

ie L* =$15,441,176

AFN = (A*/S0)?S - (L*/S0)?S - M*S1(RR)

where A* = Assets tied directly to sales=87,500,000

L* = Liabilities that increase spontaneously (AP and accruals

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.