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Finance Problems: HR Pickett, Liability, and AFN

Problem #1
The HR Pickett corporation has $500,000 of debt outstanding, and pays an interest rate of 10% annually, Pickett's annual sales are $2 millions, it's average tax rate is 30% , and it's net profit margin on sales 5%. If the company does not maintain a TIE ratio of at least 5 times, it's Bank's will refuse to renew the loans, and bankruptcy will result:
What is Pickett's TIE ratio?

Question #2
Certain liability and net worth item generally increase spontaneously with increase in sales. Put a check by those items that typically increase spontaneously:

Account Payable__________ Notes Payable to banks__________________

Accrued wages____________ Mortgage bonds___________________

Common Stocks___________ Retained Earnings___________________

Question #3
The following equation can, under certain assumptions, be used to forecast financial requirements:

AFN = (A* / So) (AS) - MS1 (RR).

Under what conditions does the equation give satisfactory predictions and when should it not be used?.

Solution Preview

Problem #1.
TIE ratio can be computed as Profit before Interest and Taxes/Total Interest Charges. Now, total Interest Charges are 10% of $500,000 of debt which is $50,000.
Net profit margin means the ratio of ...

Solution Summary

The solution completes three finance problems regarding forecast financial requirements, liabilities increases, and TIE ratios.