PRINCIPL OF FINANCE
PRINCIPL OF FINANCE FIN 301
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This 8 page Class Notes was uploaded by Mrs. Matilde Howe on Saturday September 26, 2015. The Class Notes belongs to FIN 301 at Iowa State University taught by Staff in Fall. Since its upload, it has received 13 views. For similar materials see /class/214417/fin-301-iowa-state-university in Finance at Iowa State University.
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Date Created: 09/26/15
Chapter 2 1 To nd owner s equity we must construct a balance sheet as follows Balance Sheet CA 5000 CL 4300 NFA 23 000 LTD 13000 OE TA 28 000 TL amp OE 28 000 We know that total liabilities and owner s equity TL amp OE must equal total assets of 28000 We also know that TL amp OE is equal to current liabilities plus longterm debt plus owner s equity so owner s equity is 2 The income statement for the company is Income Statement Sales 527000 Costs 280000 Depreciation 38000 209000 Interest 15000 194000 Taxes35 67900 Net income 1263100 One equation for net income is Net income Dividends Addition to retained earnings Rearranging we get Addition to retained earnings Net income 7 Dividends 4 EPS NetincomeShares DPS DiVidendsShares 5 Balance Sheet as on 7 Assets NFA 4000000 CA 3100000 Total AssetsBV 7100000 Net working capital CA 7 CL The average tax rate is the total tax paid divided by net income so Average tax rate The marginal tax rate is the tax rate on the next 1 of earnings so the marginal tax rate To calculate OCF we rst need the income statement Income Statement Sales 135 00 Costs 5400 Depreciation 1200 6900 Interest 680 Taxable income 6220 Taxes 35 2177 Net income 4043 OCF EBIT Depreciation 7 Taxes Chapter 3 7problems Using the formula for NWC we get NWC CA 7 CL So the current ratio is Current ratio CA CL And the quick ratio is Quick ratio CA 7 Inventory CL We need to nd net income rst So Pro t margin Net income Sales Net income SalesPro t margin Net income ROA Net income TA To nd ROE we need to nd total equity TA TD CE ROE Net income TE Receivables turnover Sales Receivables Receivables turnover Days sales in receivables 365 days Receivables turnover The average collection period for an outstanding accounts receivable balance was Inventory turnover COGS Inventory Inventory turnover Days sales in inventory 365 days Inventory turnover 365 655 5571 days On average a unit of inventory sat on the shelf Total debt ratio TE TA DebtEquity ratio 1 DebtEquity ratio ROE PMTATEM ROE Increase in inventory is a use of cash Increase in accounts payable is a source of cash Decrease in notes payable is a use of cash Increase in accounts receivable is a use of cash Changes in cash Payables turnover COGS Accounts payable Payables turnover Days sales in payables 365 days Payables turnover Days sales in payables The company left its bills to suppliers outstanding for 8219 days on average A large value for this ratio could imply that either 1 the company is having liquidity problems making it dif cult to pay off its shortterm obligations or 2 that the company has successfully negotiated lenient credit terms from its suppliers New investment in xed assets is found by Net investment in FA NFAend 7 NFAbeg Depreciation Net investment in FA Chapter 4 Homework problems Proforma Balance Sheet Assets 9790 Debt 5610 Equity 41 80 Total 9790 9790 If sales increases by 10 NT will also increase by 10 Equity Additions to RE Dividends paid Addition to RE Proforma balance sheet Asset 9790 Debt 5100 EquityBeg Equity RE 5725 Total 9790 10825 EFN Increase in assets 7 Increase in liabilities 3 Proforma Income statement Profoma Balance Sheet Sales 23040 Assets 111600 Debt 20400 Costs 18660 Equity 74335 Taxable Inc 4380 TaX34 1489 Total 111600 94735 NI 2891 EFN Dividend payout ratio is and the retention ratio is 60 Addition to RE Growth in sales 4 To calculate the internal growth rate we rst need to calculate the ROA which is ROANITA ROA ROA The plowback ratio b is one minus the payout ratio so Now we can use the internal growth rate equation to get Internal growth rate ROA X b l 7 ROA X b Internal growth rate 5 To calculate the sustainable growth rate we rst need to calculate the ROE which is ROENTTE R0 The plowback ratio b is one minus the payout ratio so b Now we can use the sustainable growth rate equation to get Sustainable growth rate ROE X b l 7 ROE X b Sustainable growth rate 6 Assuming costs vary with sales and a 20 percent increase in sales the pro forma income statement will look like this HEIR JORDAN CORPORATION Pro Forrna Income Statement Sales 3480000 Costs 1344000 Taxable income 2136000 Taxes 34 7 26240 Net income i 1409760 The payout ratio is constant so the dividends paid this year is the payout ratio from last year times net income or Dividends And the addition to retained earnings will be Addition to retained earnings We need to calculate the retention ratio to calculate the internal growth rate The retention ratio is b Now we can use the internal growth rate equation to get Internal growth rate ROA X b l 7 ROA X b Internal growth rate We need to calculate the retention ratio to calculate the sustainable growth rate The retention ratio is b Now we can use the sustainable growth rate equation to get Sustainable growth rate ROE X b l 7 ROE X b 9 Sustainable growth rate We rst must calculate the ROE to calculate the sustainable growth rate To do this we must realize two other relationships The total asset turnover is the inverse of the capital intensity ratio and the equity multiplier is 1 DE Using these relationships we get ROE PMTATEM ROE The plowback ratio is one minus the dividend payout ratio so b Now we can use the sustainable growth rate equation to get Sustainable growth rate ROE X b l 7 ROE X b Sustainable growth rate We must rst calculate the ROE using the DuPont ratio to calculate the sustainable growth rate The ROE is ROE PMTATEM ROE The plowback ratio is one minus the dividend payout ratio so b Now we can use the sustainable growth rate equation to get Sustainable growth rate ROE X b l 7 ROE X b Sustainable growth rate