1. A firm had Net Income of $1,000,000 and a payout ratio of 40%. If they are 70

Question

1. A firm had Net Income of $1,000,000 and a payout ratio of 40%. If they are 70% equity financed, how much can they spend on capital expenditures before needing external equity?

a) $857,143                 b) $1,333,333              c) 1,742,685                d) $2,000,000

2. Which of these statements is FALSE?

a.   All firms have to follow the same rules under GAAP

b.   Firms might window dress in order to make their statements look better

c.   Some firms might use Off Balance Sheet forms of financing

                       d.   Balance sheets report the book value of assets

Questions 3-7 use the following Financial statements. Assume that COGS is always 70% of Sales, Interest Expense is always 10% of the previous years long term debt, Depreciation is always 20% of the previous years Net Fixed Assets, and taxes are always 40% of EBT.

                                                2012                2013                2014                2015

Net Working Capital                1000                1000                1200                1300

Net Fixed Assets                      1500                                        1600               

Long Term Debt                                  2000                2040                                        2644

Total Equity                             500                460                440                  436

                                                2012                2013                2014                2015

Sales                                        xxx                  2000                                        3500

COGS                                      xxx                  1400                                        2450

Depreciation                            xxx                  300                300                  320

EBIT                                        xxx                  300                                        730

Interest                                     xxx                                        204                  236

EBT                                         xxx                                                                  494

Taxes                                       xxx                                          120                  198   

NI                                            xxx                                                                    296

Capital Expenditures                                                                400                  500

Dividends                                                        100                  200                  300

You do not have to answer each question in order. Fill out the chart above first and then answer the questions. You do NOT need to try to figure out the 2012 Income Statement. There may be more than one way to find the answers

Choose the answer that is CLOSEST to the correct answer.

3. What is 2014 Sales?

            a.1820             b. 2112                        c. 2360            d. 2680

4. What is Return on Equity in 2013?

            a. 6%               b. 9%               c. 13%             d. 17%            

5. What is Additional Financing Needed in 2015?

            a.176               b. 284              c. 324              d.376              

6. What is Capital Expenditures in 2013?

            a. 200              b. 300              c.400               d.500

7. What is the Fixed Asset Turnover in 2015?

a.  1.5                   b. 2 c. 2.5   d. 3

Explanation / Answer

1. Capital expenditure= Net Income*(1-payout)/Equity

=1000000*(1-0.4)/0.7

=857143

Answer A

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