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    Forecasting: Jill's outside capital, Kenney retained earnings

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    1 Jill's Wigs Inc. had the following balance sheet last year:

    Cash $ 800 Accounts payable $ 350
    Accounts receivable 450 Accrued wages 150
    Inventory 950 Notes payable 2,000
    Net fixed assets 34,000 Mortgage 26,500
    Common stock 3,200
    Retained earnings 4,000
    Total liabilities
    Total assets $36,200 and equity $36,200

    Jill has just invented a non-slip wig for men which she expects will cause sales to double from $10,000 to $20,000, increasing net income to $1,000. She feels that she can handle the increase without adding any fixed assets. (1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?

    2 Kenney Corporation recently reported the following income statement for 2004 (numbers are in millions of dollars):

    Sales $7,000
    Total operating costs 3,000
    EBIT $4,000
    Interest 200
    Earnings before tax (EBT) $3,800
    Taxes (40%) 1,520
    Net income available to
    common shareholders $2,280

    The company forecasts that its sales will increase by 10 percent in 2005 and its operating costs will increase in proportion to sales. The company's interest expense is expected to remain at $200 million, and the tax rate will remain at 40 percent. The company plans to pay out 50 percent of its net income as dividends, the other 50 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for 2005?

    3 Jackson Co. has the following balance sheet as of December 31, 2004.

    Assets: Claims:
    Current assets $ 600,000 Accounts payable $ 100,000
    Fixed assets 400,000 Accruals 100,000
    Notes payable 100,000
    Total current liab. $ 300,000

    Long-term debt 300,000
    Total equity 400,000
    Total asset $1,000,000 Total claims $1,000,000

    In 2004, the company reported sales of $5 million, net income of $100,000, and dividends of $60,000. The company anticipates its sales will increase 20 percent in 2005 and its dividend payout will remain at 60 percent. Assume the company is at full capacity, so its assets and spontaneous liabilities will increase proportionately with an increase in sales.

    Assume the company uses the AFN formula and all additional funds needed (AFN) will come from issuing new long-term debt. Given its forecast, how much long-term debt will the company have to issue in 2005?

    4 Snowball & Company has the following balance sheet:

    Current assets $ 7,000 A/P & Accruals $ 1,500
    Fixed assets 3,000 S-T (3-month) Loans 2,000
    Common Stock 1,500
    Ret. Earnings 5,000
    Total assets $10,000 Total claims $10,000

    Snowball's after-tax profit margin is 11 percent, and the company pays out 60 percent of its earnings as dividends. Its sales last year were $10,000; its assets were used to full capacity; no economies of scale exist in the use of assets; and the profit margin and payout ratio are expected to remain constant. The company uses the AFN equation to estimate funds requirements, and it plans to raise any required external capital as short-term bank loans. If sales grow by 50 percent, what will Snowball's current ratio be after it has raised the necessary expansion funds? (Note: Ignore any financing feedback effects.)

    5 Clayton Industries is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.

    Last year's sales = S0 $350 Last year's accounts payable $40
    Sales growth rate = g 30% Last year's notes payable (to bank) $50
    Last year's total assets = A0 $500 Last year's accruals $30
    Last year's profit margin = M 5% Target payout ratio 60%

    6 Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year?

    Last year's sales = S0 $200,000 Last year's accounts payable $50,000
    Sales growth rate = g 40% Last year's notes payable (to bank) $15,000
    Last year's total assets = A0 $135,000 Last year's accruals $20,000
    Last year's profit margin = M 20.0% Target payout ratio 25.0%

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    https://brainmass.com/business/business-management/forecasting-jills-outside-capital-kenney-retained-earnings-430869

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    Solution Summary

    Forecasting for Jill's outside capital and Kenney retained earnings are examined.

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