Chapter 12 question - Essay Example

Chapter 12 questions Chapter 12 Questions 12-3 Financial requirements in a business are determined by the number of assets requiredin a business, the liquidity or the current ratio that need to be maintained by the business, the limit of debt the business should have, the sources of equity capital the business needs and the availability of spontaneous financing. Therefore, financial requirements of business are money needed for growing the business and may come from a number of sources like; external source which is debt capital when borrowed or equity capital when owners invest in business, internal include sources from accrued profits which are retained and reinvested in the business and lastly spontaneous financing which increase as the business’s sales increase.

In a nutshell the total sources of financing are equal to the total asset requirements. The formula AFN = (Ao*/So)(∆S) -(Lo*/So)(∆S) - MS1(1 - POR) means Additional Funds Needed equals required increase in assets less spontaneous increase in liabilities and increase in retained earnings. The assumptions when using the additional funds needed equation include the assumption that the business was operating at a full capacity in the year, the assets to sales ratios remain the same, spontaneous to sales ratios remains the same and the profit margin is unchanged.

The assumptions may sometimes not be true because a business may make large amounts of earnings in profits or dividends but still lack the cash to invest; profit and cash are not the same. In addition the calculation of profit in this case is only considering the fixed operating costs and not the variable operating expenses which change proportionally with the sales. Self supporting growth rate12-5This is the maximum rate of growth a firm can achieve without accessing external capital. It is influenced by business’s capital intensity ratio; in this case the more assets a firm needs to achieve high sales level, the lower the rate of its sustainable growth.

Self supporting growth rate is related to AFN formulae because the higher the AFN the higher the lower the self supporting growth rate. It will result in the zero (0) when used in the AFN equation.12-3AFN = (0.6) ($1,000,000) - (0.1) ($1,000,000) - 0.05($6,000,000) (1 - 0)= $600,000 - $100,000 - $300,000= $200,000 the additional funds needed for the coming years is two hundred thousand dollars. The AFN is different from the previous questions because the company has high internal source of funds unshared resulting in high level of retained earnings hence reducing the amount of AFN.12-5 (a)Total liabilities and equity= accounts payable +long term debt + common stock + retained earnings$1,200,000 = $375,000 + Long-term debt + $425,000 + $295,000Long-term debt = $105,000.

Total debt = Accounts payable + Long-term debt = $375,000 + $105,000 = $480,000. Optionally,Total debt = Total liabilities and equity - Common stock - Retained earnings = $1,200,000 - $425,000 - $295,000 = $480,000.Therefore, Bertin’s total long term debt and total liabilities in 2010 is four hundred and eighty thousand dollars.12-5 (b)Assets/Sales (A*/S) = $1,200,000/$2,500,000 = 48%. While L*/Sales = $375,000/$2,500,000 = 15%, therefore, AFN = (A*/S) (∆S) - (L*/S) (∆S) - MS1 (1 - d) - New common stock.

AFN – New stock = New long-term debt (0.48) ($625,000) - (0.15) ($625,000) - (0.06) ($3,125,000) (0.6) - $75,000 = $300,000 - $93,750 - $112,500 - $75,000 = $18,750.In 2011 therefore, the new long term debt financing will be $18, 7512-7 (a)AFN = (Ao*/So)(∆S) -(Lo*/So)(∆S) - MS1(1 – POR)122.5/350 (70) – 17.5/350 (70)- 10.5/350(420)(0.6)=$13.44 Upton’s projected external capital requirement will be )=$13.4412- 7(b)AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings 12-7 (c)Profit Margin = $10.

5/$350 = 3%.Payout = $4.2/$10.5 = 40%.NI = $350  1.2  0.03 = $12.6.Addition to RE = NI - DIV = $12.6 - 0.4($12.6) = 0.6($12.6) = $7.56.ReferenceBrigham, E. & Daves, P. (2010). Intermediate Financial Management. New York: Cengage Learning.