Ch 12-11: Percentage of sales method and ROE You have been given the attached information on the Crum Company. Crum expects sales to grow by 50 percent in 2014 and operating costs should increase in proportion to sales. Fixed assets were being operated at 40 percent of capacity in 2013, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase in proportion to sales during 2014. The company plans to finance any external funds needed as 35 percent notes payable and 65 percent common stock. The interest rate is 8 percent; base interest expense on the debt at the beginning of the year (cash earns no interest income). The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding. What is Crum's projected ROE using the percentage of sales method? (Ignore any financing feedback effects.) Information on the Crum Company: 2014 Forecast 2014 After AFN Sales Operating costs EBIT Interest EBT Taxes (40%) Net Income Dividends (60%) Add'n to R.E. 2013 $1,000.00 800.00 $ 200.00 15.00 $ 185.00 74.00 $111.00 66.60 $ 44.40 $ 700.00 300.00 $1.000.00 Current Assets Net fixed Assets Total assets A/P and Accruals N/P Common stock Retained earnings $ 150.00 200.00 150.00 500.00 Total Liab & Equity $1,000.00 AFN Profit Margin ROE Debt/Assets Current ratio Payout Ratio AFN Financing N/P Common Stock 11.04% 16.98% 35.00% 2.00% 60.00% Dollars Weights 0.3500 0.6500 1.0000 Ch 12-11: Percentage of sales method and ROE You have been given the attached information on the Crum Company. Crum expects sales to grow by 50 percent in 2014 and operating costs should increase in proportion to sales. Fixed assets were being operated at 40 percent of capacity in 2013, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase in proportion to sales during 2014. The company plans to finance any external funds needed as 35 percent notes payable and 65 percent common stock. The interest rate is 8 percent; base interest expense on the debt at the beginning of the year (cash earns no interest income). The dividend payout ratio will remain constant, irrespective of how many shares of stock are outstanding. What is Crum's projected ROE using the percentage of sales method? (Ignore any financing feedback effects.) Information on the Crum Company: 2014 Forecast 2014 After AFN Sales Operating costs EBIT Interest EBT Taxes (40%) Net Income Dividends (60%) Add'n to R.E. 2013 $1,000.00 800.00 $ 200.00 15.00 $ 185.00 74.00 $111.00 66.60 $ 44.40 $ 700.00 300.00 $1.000.00 Current Assets Net fixed Assets Total assets A/P and Accruals N/P Common stock Retained earnings $ 150.00 200.00 150.00 500.00 Total Liab & Equity $1,000.00 AFN Profit Margin ROE Debt/Assets Current ratio Payout Ratio AFN Financing N/P Common Stock 11.04% 16.98% 35.00% 2.00% 60.00% Dollars Weights 0.3500 0.6500 1.0000
