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    Financial Management Profit Margins

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    Financial Management Practice Problems:
    (Please show step-by-step calculations with formula. These example problems will be used to study for similar equations to work out on my own... Thank you).
    Problems: (1-3, 7)
    (14-1) Baxter Video Products' sales are expected to increase from $5 million in 2007 to $6 million in 2008 or by 20%. Its assets totaled $3 million at the end of 2007. Baxter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2007, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%.
    a. Use the AFN formula to forecast Baxter's additional funds needed for the coming year.
    b. What would be the additional funds needed if the company's year-end 2007 assets had been $4 million?
    c. Assume that all other numbers are the same. Why is this AFN different from the one you found in problem (14-1)?
    d. Is the company's "capital intensity" the same or different?
    e. Return to the assumption that the company had $3 million in assets at the end of 2007, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year?
    f. Why is this AFN different from the one you found in problem (14-1)?
    Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Upton's balance sheet as of December 31, 2007, is shown here (millions of dollars).
    Cash $ 3.5 Accounts payable $ 9.0
    Receivables 26.0 Notes payable 18.0
    Inventories 58.0 Accruals 8.5
    Total current assets $ 87.5 Total current liabilities $ 35.5
    Net fixed assets 35.0 Mortgage loan 6.0
    Common stock 15.0
    ____ Retained earnings 66.0
    Total assets $122.5 Total liabilities and equity $122.5
    ===== =====
    Sales for 2007 were $350 million, while net income for the year was $10.5, million. Upton paid dividends of $4.2 million to common stockholders. The firm is operation at full capacity. Assume that all ratios remain constant.
    a. If sales are projected to increase by $70 million, or 20%, during 2008, use the AFN equation to determine Upton's projected external capital requirements.

    Problems: (1,4,13,& 14)

    (4-1) Green Sisters has a DSO of 20 days. The company's average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year.

    (4-4) A company has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0 times. What is its P/E ratio?

    (4-13) Data for Morton Chip Company and its industry average follow.
    a. Calculate the indicated ratios for Morton.
    b. Outline Morton's strengths and weaknesses as revealed by your analysis.

    Morton Chip Company: Balance Sheet as of December 31, 2007 (In Thousands)
    Cash $77,500 Accounts payable $129,000
    Receivables 336,000 Notes payable 84,000
    Inventories 241,500 Other current liabilities 117,000
    Total current assets $655,000 Total current liabilities $330,000
    Net fixed assets 292,500 Long-term debt 256,500
    _______ Common equity 361,000
    Total assets $947,500 Total liabilities and equity $947,500
    ======= =======
    Morton Chip Company: Income Statement for Year Ended December 31, 2007 (In Thousands)
    Sales $1,607,500
    Cost of goods sold 1,392,500
    Selling, general, and administrative expenses 145,000
    Earnings before interest and taxes (EBIT) $ 70,000
    Interest expense 24,500
    Earnings before taxes (EBIT) $ 45.500
    Federal and state income taxes (40%) ___18,200
    Net income $ 27,300
    Ratio Morton Industry Average

    Current assets/current liabilities ______ 2.0X
    Days sales outstanding * ______ 35.0 days
    Sales/inventory ______ 6.7X
    Sales/fixed assets ______ 12.1X
    Sales/total assets ______ 3.0X
    Net income/sales ______ 1.2%
    Net income/total assets ______ 3.6%
    Net income/ common equity ______ 9.0%
    Total debt/ total assets ______ 60.0%

    *Calculation is based on a 365-day year.

    (4-14) The Jimenez Corporation's forecasted 2008 financial statements follow, along with some industry average ratios.
    a. Calculate Jimenez's 2008 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez's projected strengths and weaknesses.

    Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2008
    Cash $ 72,000
    Accounts receivable 439,000
    Inventories __894,000
    Total current assets $1,405,000
    Fixed assets 431,000
    Total assets $1,836,000
    Accounts and notes payable $ 432,000
    Accruals __170,000
    Total current liabilities $ 602,000
    Long-term debt 404,290
    Common-stock 575,000
    Retained earnings 254,710
    Total liabilities and equity $1,836,000
    Jimenez Corporation: Forecasted Income Statement for 2008

    Sales $4,290,000
    Cost of goods sold 3,580,000
    Selling, general, and administrative expenses 370,320
    Depreciation 159,000
    Earnings before taxes (EBIT) $ 180,680
    Taxes (40%) 72,272
    Net income $ 108,408
    Per-Share Data
    EPS $4.71
    Cash dividends per share $0.95
    P/E ratio 5X
    Market price (average) $23.57
    Number of shares outstanding 23,000

    Industry Financial Ratios (2007)*
    Quick ratio 1.0X
    Current ratio 2.7X
    Inventory turnover ** 7.0X
    Days sales outstanding*** 32 days
    Fixed assets turnover ** 13.0X
    Total assets turnover ** 2.6X
    Return on assets 9.1%
    Return on equity 18.2%
    Debt ratio 50.0%
    Profit margin on sales 3.5%
    P/E ratio 6.0X
    P/ cash flow ratio 3.5X

    *Industry average ratios have been constant for the past 4 years.
    **Based on year-end balance sheet figures.
    ***Calculation is based on a 365-day year.

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    Solution Summary

    The expert examines financial management profit margins. The AFN formula is used.