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FratBro23
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Question description

Return on assets and cost of financing:  

Based on the following information, if managers want to earn a 12% ROA, how much profit must the company generate?

Non-current assets

$ 1,260,000

Current assets

250,000

Profit for the year

170,000

Cost of debt (after tax)

12%

Cost of equity

12%


Return on assets and cost of financing:  

Based on the following information, if managers want to earn a 15% ROA, how much profit must the company generate?

Non-current assets

$ 1,260,000

Current assets

250,000

Profit for the year

170,000

Cost of debt (after tax)

12%

Cost of equity

12%


With the following data, prepare a statement of income and a statement of financial position. You will have to fill in the missing financial statement accounts.

Statement of income
Revenue
Cost of sales-700,000
Gross profit300,000
Distribution costs-200,000
Profit before taxes
Income tax expense
Profit for the year65,000
Statement of financial position
Equity
Share capital500,000
Retained earnings
Total equity1,100,000
Long-term borrowings800,000
Total current liabilities600,000
Total liabilities
Total equity and liabilities
Non-current assets
Total current assets500,000
Total assets2,500,000

Skip to question text.

Assume that a company earns $280,000 in profit for the year on $3 million in revenue. The board of directors decides to keep half to pay for dividends and to reinvest the rest in the company. Sixty percent of the retained earnings are invested in non-current assets and the rest is invested in working capital for growth.

Calculate, as a percentage of revenue, how much would be kept in the company for growth (i.e., working capital and non-current assets) and how much would be used to pay dividends.  Round to the nearest hundredth percent (two decimal places) but do not include the % symbol.

First split: (rounded)

50% for retained earnings  [ Select ]["4.7%", "9.3%", "2.8%", "1.9%"]

50% for dividends  [ Select ]["4.7%", "9.3%", "2.8%", "1.9%"]

Second split:(rounded)

60% of retained earnings for non-current assets  [ Select ]["2.8%", "1.9%", "4.7%", "9.3%"]

40% of retained earnings for current assets [ Select ]["1.9%", "2.8%", "4.7%", "9.3%"]

Skip to question text.

Select the type of business decision represented from either an operating decision, financing decision or investing decision.

Change in long-term borrowings [ Select ]["Financing decision", "Operating decision", "Investing decision"]

Profit for the year [ Select ]["Operating decision", "Financing decision", "Investing decision"]

Acquisition of a business [ Select ]["Investing decision", "Operating decision", "Financing decision"]

Depreciation/amortization [ Select ]["Operating decision", "Financing decision", "Investing decision"]

Share capital issue [ Select ]["Financing decision", "Operating decision", "Investing decision"]

Change in trade receivables [ Select ]["Operating decision", "Financing decision", "Investing decision"]

Net change in short-term borrowings [ Select ]["Operating decision", "Financing decision", "Investing decision"]

Sale of non-current assets [ Select ]["Investing decision", "Operating decision", "Financing decision"]

Change in trade and other payables [ Select ]["Operating decision", "Financing decision", "Investing decision"]

Additions to property, plant, and equipment [ Select ]["Investing decision", "Operating decision", "Financing decision"]


Sources

Amounts

Trade and other payables

$200,000

Short-term borrowings

250,000

Mortgage

500,000

Long-term borrowings

250,000

Share capital

300,000

Retained earnings

800,000


The before-tax bank charges are 11.0% for the short-term borrowings, 10.0% for the long-term borrowings, and 10.5% on the mortgage. The shareholders expect to earn 16%. Assume that the company’s income tax rate is 50%.

Questions

1.  Calculate the company’s after-tax cost of borrowing rounded to the nearest tenth of a percent. 

2.  Calculate the company’s weighted average cost of capital rounded to the nearest tenth of a percent.  


Owners of a business are contemplating investing $550,000 in non-current assets in early January 2014. They are exploring ways to finance it. In 2012, the company had $250,000 in trade receivables, an amount that it expects will increase to $275,000 in 2013. The inventory level for 2012 was $430,000 and, having introduced a new inventory management system, the owners expect to be more efficient in managing it. They forecast a level of $370,000 in inventories by the end of 2013. They expect a substantial increase in revenue, which will increase their profit from $150,000 in 2012 to $230,000 in 2013.

Questions

1.  How much cash will be generated from internal operations by the end of 2013? 

2.  Will the owners have to borrow money from investors to finance the expansion?  [yes/no]

3.   If yes, how much? [amount]


Tutor Answer

(Top Tutor) Daniel C.
(997)
School: UT Austin
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