Financial Planning and Control

The Roeder Company has the following balance sheet and summarized income statement as of December 31, 201x (in millions of $):

Cash $ 10 Accounts Payable $ 40

Receivables 85 Notes Payable 10

Inventory 100 Accrued wages and taxes 25

Current Assets $195 Current Liabilities $ 75

Net Fixed Assets 150 Mortgage Bonds 72

Common Stock 150

Retained Earnings 48

Total Assets $345 Total Claims $345

Sales $500

Net Income 20

Dividends Paid 8

Roeder's anticipates that sales will increase to $750 million next year.

1. Find Roeder's additional funds need using the short-cut method. Restate the balance sheet with the assumption that all AFN are raised through long-term debt. How does the new balance sheet look?

2. Rework Roeder's AFN assuming that sales will increase to $900 million next year. What conclusion can we make about the relationship between sales growth and AFN, all other factors held constant? Explain why this relationship exists.

3. Rework Roeder's AFN assuming that dividends are $10 million (In all of the following questions, always go back to the original information. Do not use your latest change). What conclusion can we make about the relationship between dividend payout and AFN, all other factors held constant? Explain why this relationship exists.

4. Rework Roeder's AFN assuming that the net income is $50 million (keep dividend payout ratio at its original level). What conclusion can we make about the relationship between profit margin and AFN, all other factors held constant? Explain why this relationship exists.

5. Rework Roeder's AFN assuming that the firm has more than enough excess capacity to meet its projected sales growth. In other words, assume that no new fixed assets are needed. What conclusion can we make about the relationship between excess capacity and AFN, all other factors held constant? Explain why this relationship exists.

6. The amount of assets required per dollar of sales, A/S, is often called the capital intensity ratio. This factor can be quite large (as in a utility company) or very small (as in a financial services firm). What conclusion can we make about the relationship between the capital intensity ratio and AFN, all other factors held constant? Explain why this relationship exists.

7. Calculate the rate at which the firm may grow without requiring external funds. Calculate the sustainable growth rate.