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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?

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    Solution Summary

    This solution contains step-by-step calculations to determine the AFN Equation, sales values, forecasts and other accounting concepts.

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