Question 1

Assume that Premier paper expects the sales to increase by 20% every year over the next 5 years. Net working capital i.e. current assets less current liabilities is estimated as 20% of revenues and investment in net fixed assets will be 25% of revenues. Dividend payout ratio is 60%. The costs will be 90% of revenues and depreciation will be 10% of fixed assets at the start of the year. Interest will be 10% of long-term debt at start of the year. Tax rate is 40%. Analyse the external financing needed for the next 5 years. Assume that any external financing needed will be met through long term borrowing.

(a) Calculate the depreciation amount and gross fixed asset for the years 2017, 2018, 2019, 2020, 2021

(10 marks)

(b) Calculate investment in net working capital for the years 2017, 2018, 2019, 2020, 2021

(5 marks)

(c) Compute the total investment needs for the years 2017, 2018, 2019, 2020, 2021 (5 marks)

(d) Prepare the Pro Forma Income Statement and Balance Sheet for the years 2017, 2018, 2019, 2020, 2021

(30 marks)

The balance sheet and income statement of Premier Paper are shown below: Balance sheet as of 31 December (in Smillion 2015 2016 Current Assets Cash and securities Receivables Inventor Total current assets 75 433.1440 339.9350 848 110 900 Fixed assets Property, plant and equipment Less accumulated depreciation Net fixed assets Total assets 929.51,000 96.7450 532.8 550 1380.8 1450 Current liabilities Debt due within one vear Payables Total Current Liabilities 100 96.6 349.9 360 446.5 460 Long term debt Shareholder equit Total liabilities and shareholder equit 425 509.3540 1380.81450 450 Market value of equit Average number of shares (million Share price 598 14.1614.16 42.25 50 708