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# AFN Equation, Sales, Forecasts & Others

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17-1

AFN EQUATION Carter Corporation's sales are expected to increase from \$5 million in problems 2008 to \$6 million in 2009, or by 20%. Its assets totaled \$3 million at the end of 2008. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2008, current liabilities are \$1 million, consisting of \$250,000 of accounts payable, \$500,000 of notes payable, and \$250,000 of accrued liabilities. Its profit margin is forecasted to be 5%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.

17-5

EXCESS CAPACITY
Walter Industries has \$5 billion in sales and \$1.7 billion in fixed assets. Currently, the company's fixed assets are operating at 90% of capacity.

a. What level of sales could Walter Industries have obtained if it had been operating at full capacity?

b. What is Walter's Target fixed assets/Sales ratio?

c. If Walter's sales increase 12%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio?

17-7

PRO FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):

Sales \$3,000
Operating costs excluding depreciation 2,450
EBITDA \$ 550
Depreciation 250
EBIT \$ 300
Interest 125
EBT 175
Taxes (40%) 70
Net income \$ 105
Looking ahead to the following year, the company's CFO has assembled this information:
? Year-end sales are expected to be 10% higher than the \$3 billion in sales generated last year.
? l Year-end operating costs, excluding depreciation, are expected to equal 80% of year end sales.
? Depreciation is expected to increase at the same rate as sales.
? Interest costs are expected to remain unchanged.
? The tax rate is expected to remain at 40%.
On the basis of that information, what will be the forecast for Roberts' year-end net income?

17-10

REGRESSION AND RECEIVABLES Edwards Industries has \$320 million in sales. The company expects that its sales will increase 12% this year. Edwards' CFO uses a simple linear regression to forecast the company's receivables level for a given level of projected sales. On the basis of recent history, the estimated relationship between receivables and sales (in millions of dollars) is as follows:
Receivables = \$9.25 + 0.07(Sales)

18-1

OPTIONS A call option on Bedrock Boulders stock has a market price of \$7. The stock sells for \$30 a share, and the option has an exercise price of \$25 a share.
a. What is the exercise value of the call option?
b. What is the premium on the option?

18-2

OPTIONS The exercise price on one of Flanagan Company's call options is \$15, its exercise value is \$22, and its premium is \$5. What are the option's market value and the stock's current price?