1. (DuPont Identity) If Roten Rooters, Inc., has an equity multiplier of 1.45, total asset turnover of 1.80, and a profit margin of 5.5%, what is its ROE?
1. (DuPont Identity) Kindle Fire Prevention Corp. has a profit margin of 4.6%, total asset turnover of 2.3, and ROE of 19.14%. What is this firm’s debt to equity ratio (Total Debt / Total Equity)?
Chapter 16 Problems
1. The most recent financial statements for GPS, Inc., are shown here:
Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,300 was paid, and the company wishes to maintain a constant payout ratio. Next year's sales are projected to be $30,360.
a) What is the sales growth rate?
b) What is the “target” cost to sales?
c) What is the “target” profit margin?
d) What is the payout ratio? Retention ratio?
e) Come up with a pro-forma income statement.
f) What is the “target” fixed assets to sales ratio?
g) What is the increase in total assets needed to support the expected sales?
5. (End of Chapter) AFN Equation Carter Corporation’s sales are expected to increase from $5 million in 2014 to $6 million in 2015, or by 20%. Its assets totaled $3 million at the end of 2014. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2014, 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.
6. (End of Chapter 16-2) AFN Equation Refer to the above problem. What additional funds would be needed if the company’s year-end 2014 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 16-1? Is the company’s “capital intensity” the same or different? Explain.
7. (End of Chapter Problem 16-5) 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?
Additional Homework Problems
4-6 DuPont and ROE A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE?
4-8 DuPont and Net Income Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2×. Common equity on the firm’s balance sheet is 50% of its total assets. What is its net income?
Step 1: Calculate total assets from information given.
Step 2: Calculate net income.
16-3 AFN Equation Refer to Problem 16-1 and assume that the company had $3 million in assets at the end of 2014. However, now assume that the company pays no dividends. Under these assumptions, what additional funds would be needed for the coming year? Why is this AFN different from the one you found in Problem 16-1 (#5 on our problem set) ?
16-4 Pro Forma Income Statement Austin Grocers recently reported the following 2014 income statement (in millions of dollars):
For the coming year, the company is forecasting a 25% increase in sales; and it expects that its year-end operating costs, including depreciation, will equal 70% of sales. Austin’s tax rate, interest expense, and dividend payout ratio are all expected to remain constant.
a. What is Austin’s projected 2015 net income?
b. What is the expected growth rate in Austin’s dividends?