1 AFN equation Broussard Skateboard's sales are expected to increase by 20 from $7 6 million in 2016 to $9 12 million in 2017 Its assets totaled $5 million at the end of 2016 Broussard is already at full capacity, so its assets must grow at the same rate as projected sales At the end of 2016, current liabilities were $1 4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals The after tax profit margin is forecasted to be 4 , and the forecasted payout ratio is 75 Use the AFN equation to forecast Broussard's additional funds needed for the coming year Round your answer to the nearest dollar Do not round intermediate calculations 2 AFN equation Broussard Skateboard's sales are expected to increase by 25 from $8 2 million in 2016 to $10 25 million in 2017 Its assets totaled $6 million at the end of 2016 Broussard is already at full capacity, so its assets must grow at the same rate as projected sales At the end of 2016, current liabilities were $1 4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals The after tax profit margin is forecasted to be 4 , and the forecasted payout ratio is 60 What would be the additional funds needed Do not round intermediate calculations Round your answer to the nearest dollar $ Assume that an otherwise identical firm had $7 million in total assets at the end of 2016 The identical firm's capital intensity ratio (A 0 S 0 ) is Select higher thanlower thanequal toItem 2 than Broussard's therefore, the identical firm is Select lessmorethe sameItem 3 capital intensive it would require Select a smallera largerthe sameItem 4 increase in total assets to support the increase in sales 3 AFN Equation Broussard Skateboard's sales are expected to increase by 20 from $7 2 million in 2016 to $8 64 million in 2017 Its assets totaled $5 million at the end of 2016 Broussard is already at full capacity, so its assets must grow at the same rate as projected sales At the end of 2016, current liabilities were $1 4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals The after tax profit margin is forecasted to be 3 Assume that the company pays no dividends Under these assumptions, what would be the additional funds needed for the coming year Do not round intermediate calculations Round your answer to the nearest dollar $ Why is this AFN different from the one when the company pays dividends I Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed II Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed III Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed IV Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed V Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed Select IIIIIIIVV 4 Forecasted Statements and Ratios Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars) Cash $ 3 5 Accounts payable $ 9 0 Receivables 26 0 Notes payable 18 0 Inventories 58 0 Line of credit 0 Total current assets $ 87 5 Accruals 8 5 Net fixed assets 35 0 Total current liabilities $ 35 5 Mortgage loan 6 0 Common stock 15 0 Retained earnings 66 0 Total assets $122 5 Total liabilities and equity $122 5 Sales for 2016 were $275 million and net income for the year was $8 25 million, so the firm's profit margin was 3 0 Upton paid dividends of $3 3 million to common stockholders, so its payout ratio was 40 Its tax rate was 40 , and it operated at full capacity Assume that all assets sales ratios, (spontaneous liabilities) sales ratios, the profit margin, and the payout ratio remain constant in 2017 Do not round intermediate calculations If sales are projected to increase by $50 million, or 18 18 , during 2017, use the AFN equation to determine Upton's projected external capital requirements Enter your answer in millions For example, an answer of $1 2 million should be entered as 1 2, not 1,200,000 Round your answer to two decimal places $ million Using the AFN equation, determine Upton's self supporting growth rate That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds Round your answer to two decimal places Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017 Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt) Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016 What is the amount of the line of credit reported on the 2017 forecasted balance sheets ( Hint You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement ) Round your answers to the nearest cent Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars) Cash $ Receivables $ Inventories $ Total current assets $ Net fixed assets $ Total assets $ Accounts payable $ Notes payable $ Line of credit $ Accruals $ Total current liabilities $ Mortgage loan $ Common stock $ Retained earnings $ Total liabilities and equity $ 5 Financing Deficit Garlington Technologies Inc 's 2016 financial statements are shown below Balance Sheet as of December 31, 2016 Cash $ 180,000 Accounts payable $ 360,000 Receivables 360,000 Notes payable 156,000 Inventories 720,000 Line of credit 0 Total current assets $1,260,000 Accruals 180,000 Fixed assets 1,440,000 Total current liabilities $ 696,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000 Income Statement for December 31, 2016 Sales $3,600,000 Operating costs 3,279,720 EBIT $ 320,280 Interest 18,280 Pre tax earnings $ 302,000 Taxes (40 ) 120,800 Net income 181,200 Dividends $ 108,000 Suppose that in 2017 sales increase by 10 over 2016 sales and that 2017 dividends will increase to $150,000 Forecast the financial statements using the forecasted financial statement method Assume the firm operated at full capacity in 2016 Use an interest rate of 10 , and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year) Cash does not earn any interest income Assume that the all new debt will be in the form of a line of credit Round your answers to the nearest dollar Do not round intermediate calculations Garlington Technologies Inc Pro Forma Income Statement December 31, 2017 Sales $ Operating costs $ EBIT $ Interest $ Pre tax earnings $ Taxes (40 ) $ Net income $ Dividends $ Addition to RE $ Garlington Technologies Inc Pro Forma Balance Statement December 31, 2017 Cash $ Receivables $ Inventories $ Total current assets $ Fixed assets $ Total assets $ Accounts payable $ Notes payable $ Accruals $ Total current liabilities $ Common stock $ Retained earnings $ Total liabilities and equity $ 6 Corporate Governance Agency Conflicts Firms must provide the right incentives if they are to get Select shareholderscreditorsmanagersItem 1 to focus on long run value maximization Conflicts exist between managers and stockholders and between stockholders (represented by managers) and Select employeesdebtholderscustomersItem 2 Managers' personal goals may compete with shareholder wealth maximization However, managers can be motivated to act in their stockholders' best interests through (1) reasonable Select vacationcompensationperquisiteItem 3 packages, (2) firing managers, and (3) the threat of hostile takeovers If a firm's stock is undervalued, corporate raiders will see it as a bargain and will attempt to capture the firm in a hostile takeover Select StockholdersBondholdersItem 4 generally receive fixed payments regardless of how the firm does, while Select stockholdersbondholdersItem 5 earn higher returns when the firm's earnings are higher Investments in Select riskysafeItem 6 ventures, that have great payoffs to stockholders if successful but threaten bankruptcy if they fail, create conflicts In addition, the use of additional Select equitydebtassetsItem 7 increases stockholder debtholder conflicts Consequently, bondholders attempt to protect themselves by including Select ethicscovenantscompensationItem 8 in bond agreements that limit firms' use of additional Select equitydebtassetsItem 9 and constrain Select customers'employees'managers'Item 10 actions

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1.AFN equation Broussard Skateboard's sales are expected to increase by 20% from $7.6 million in 2016 to $9.12 million in 2017. Its assets totaled $5

1.AFN equation

Broussard Skateboard's sales are expected to increase by 20% from $7.6 million in 2016 to $9.12 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 4%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

2.AFN equation

Broussard Skateboard's sales are expected to increase by 25% from $8.2 million in 2016 to $10.25 million in 2017. Its assets totaled $6 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 4%, and the forecasted payout ratio is 60%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar. $

Assume that an otherwise identical firm had $7 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A₀*/S₀) is -Select-higher thanlower thanequal toItem 2 than Broussard's; therefore, the identical firm is -Select-lessmorethe sameItem 3 capital intensive - it would require -Select-a smallera largerthe sameItem 4 increase in total assets to support the increase in sales.

3.AFN Equation

Broussard Skateboard's sales are expected to increase by 20% from $7.2 million in 2016 to $8.64 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar. $

Why is this AFN different from the one when the company pays dividends? I. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed. II. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed. III. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed. IV. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed. V. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed. -Select-IIIIIIIVV

Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Cash	$ 3.5	Accounts payable	$ 9.0
Receivables	26.0	Notes payable	18.0
Inventories	58.0	Line of credit	0
Total current assets	$ 87.5	Accruals	8.5
Net fixed assets	35.0	Total current liabilities	$ 35.5
		Mortgage loan	6.0
		Common stock	15.0
		Retained earnings	66.0
Total assets	$122.5	Total liabilities and equity	$122.5

Sales for 2016 were $275 million and net income for the year was $8.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.3 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations.

If sales are projected to increase by $50 million, or 18.18%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million
Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places. %

Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent.

Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars)
Cash	$
Receivables	$
Inventories	$
Total current assets	$
Net fixed assets	$
Total assets	$
Accounts payable	$
Notes payable	$
Line of credit	$
Accruals	$
Total current liabilities	$
Mortgage loan	$
Common stock	$
Retained earnings	$
Total liabilities and equity	$

Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Cash	$ 180,000	Accounts payable	$ 360,000
Receivables	360,000	Notes payable	156,000
Inventories	720,000	Line of credit	0
Total current assets	$1,260,000	Accruals	180,000
Fixed assets	1,440,000	Total current liabilities	$ 696,000
		Common stock	1,800,000
		Retained earnings	204,000
Total assets	$2,700,000	Total liabilities and equity	$2,700,000

Income Statement for December 31, 2016

Sales	$3,600,000
Operating costs	3,279,720
EBIT	$ 320,280
Interest	18,280
Pre-tax earnings	$ 302,000
Taxes (40%)	120,800
Net income	181,200
Dividends	$ 108,000

Suppose that in 2017 sales increase by 10% over 2016 sales and that 2017 dividends will increase to $150,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 10%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.

Garlington Technologies Inc. Pro Forma Income Statement December 31, 2017
Sales		$
Operating costs		$
EBIT		$
Interest		$
Pre-tax earnings		$
Taxes (40%)		$
Net income		$
Dividends:		$
Addition to RE:		$

Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017
Cash		$
Receivables		$
Inventories		$
Total current assets		$
Fixed assets		$
Total assets		$
Accounts payable		$
Notes payable		$
Accruals		$
Total current liabilities		$
Common stock		$
Retained earnings		$
Total liabilities and equity		$

Corporate Governance: Agency Conflicts

Firms must provide the right incentives if they are to get -Select-shareholderscreditorsmanagersItem 1 to focus on long-run value maximization. Conflicts exist between managers and stockholders and between stockholders (represented by managers) and -Select-employeesdebtholderscustomersItem 2 . Managers' personal goals may compete with shareholder wealth maximization. However, managers can be motivated to act in their stockholders' best interests through (1) reasonable -Select-vacationcompensationperquisiteItem 3 packages, (2) firing managers, and (3) the threat of hostile takeovers. If a firm's stock is undervalued, corporate raiders will see it as a bargain and will attempt to capture the firm in a hostile takeover. -Select-StockholdersBondholdersItem 4 generally receive fixed payments regardless of how the firm does, while -Select-stockholdersbondholdersItem 5 earn higher returns when the firm's earnings are higher. Investments in -Select-riskysafeItem 6 ventures, that have great payoffs to stockholders if successful but threaten bankruptcy if they fail, create conflicts. In addition, the use of additional -Select-equitydebtassetsItem 7 increases stockholder/debtholder conflicts. Consequently, bondholders attempt to protect themselves by including -Select-ethicscovenantscompensationItem 8 in bond agreements that limit firms' use of additional -Select-equitydebtassetsItem 9 and constrain -Select-customers'employees'managers'Item 10 actions.