Cha03 罗斯公司理财第九版原版书课后习题

 In Their Own WordsROBERT C. HIGGINS ON SUSTAINABLE GROWTHMost financial officers know intuitively that it takes money to make money. Rapid sales growthrequires increased assets in the form of accounts receivable, inventory, and fixed plant, which, in turn,require money to pay for assets. They also know that if their company does not have the money whenneeded, it can literally “grow broke.” The sustainable growth equation states these intuitive truthsexplicitly.Sustainable growth is often used by bankers and other external analysts to assess a company’screditworthiness. They are aided in this exercise by several sophisticated computer software packagesthat provide detailed analyses of the company’s past financial performance, including its annualsustainable growth rate.Bankers use this information in several ways. Quick comparison of a company’s actual growth rateto its sustainable rate tells the banker what issues will be at the top of management’s financial agenda.If actual growth consistently exceeds sustainable growth, management’s problem will be where to getthe cash to finance growth. The banker thus can anticipate interest in loan products. Conversely, ifsustainable growth consistently exceeds actual, the banker had best be prepared to talk aboutinvestment products because management’s problem will be what to do with all the cash that keepspiling up in the till.Bankers also find the sustainable growth equation useful for explaining to financially inexperiencedsmall business owners and overly optimistic entrepreneurs that, for the long-run viability of theirbusiness, it is necessary to keep growth and profitability in proper balance.Finally, comparison of actual to sustainable growth rates helps a banker understand why a loanapplicant needs money and for how long the need might continue. In one instance, a loan applicantrequested $100,000 to pay off several insistent suppliers and promised to repay in a few months whenhe collected some accounts receivable that were coming due. A sustainable growth analysis revealed thatthe firm had been growing at four to six times its sustainable growth rate and that this pattern was likelyto continue in the foreseeable future. This alerted the banker that impatient suppliers were only asymptom of the much more fundamental disease of overly rapid growth, and that a $100,000 loan wouldlikely prove to be only the down payment on a much larger, multiyear commitment.Robert C. Higgins is Professor of Finance at the University of Washington. He pioneered the useof sustainable growth as a tool for financial analysis. The final plan will therefore implicitly contain different goals in different areas and also satisfy manyconstraints. For this reason, such a plan need not be a dispassionate assessment of what we think thefuture will bring; it may instead be a means of reconciling the planned activities of different groups and away of setting common goals for the future.However it is done, the important thing to remember is that financial planning should not become apurely mechanical exercise. If it does, it will probably focus on the wrong things. Nevertheless, thealternative to planning is stumbling into the future. Perhaps the immortal Yogi Berra (the baseballcatcher, not the cartoon character), said it best: “Ya gotta watch out if you don’t know where you’regoin’. You just might not get there.”7Summary and ConclusionsThis chapter focuses on working with information contained in financial statements. Specifically, westudied standardized financial statements, ratio analysis, and long-term financial planning.1.

We explained that differences in firm size make it difficult to compare financial statements, andwe discussed how to form common-size statements to make comparisons easier and moremeaningful.

Evaluating ratios of accounting numbers is another way of comparing financial statementinformation. We defined a number of the most commonly used ratios, and we discussed thefamous Du Pont identity.

We showed how pro forma financial statements can be generated and used to plan for futurefinancing needs.

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After you have studied this chapter, we hope that you have some perspective on the uses and abusesof financial statement information. You should also find that your vocabulary of business and financialterms has grown substantially.

Concept Questions

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Financial Ratio Analysis A financial ratio by itself tells us little about a company becausefinancial ratios vary a great deal across industries. There are two basic methods for analyzingfinancial ratios for a company: Time trend analysis and peer group analysis. In time trend analysis,you find the ratios for the company over some period, say five years, and examine how each ratiohas changed over this period. In peer group analysis, you compare a company’s financial ratios tothose of its peers. Why might each of these analysis methods be useful? What does each tell youabout the company’s financial health?

Industry-Specific Ratios So-called “same-store sales” are a very important measure forcompanies as diverse as McDonald’s and Sears. As the name suggests, examining same-store salesmeans comparing revenues from the same stores or restaurants at two different points in time.Why might companies focus on same-store sales rather than total sales?

Sales Forecast Why do you think most long-term financial planning begins with salesforecasts? Put differently, why are future sales the key input?

Sustainable Growth In the chapter, we used Rosengarten Corporation to demonstrate how tocalculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67percent. If you calculate the sustainable growth rate for Rosengarten, you will find it is only 5.14percent. In our calculation for EFN, we used a growth rate of 25 percent. Is this possible? (Hint:Yes. How?)

EFN and Growth Rate Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projectedEFN. What does this tell you about the firm’s sustainable growth rate? Do you know, with certainty,if the internal growth rate is greater than or less than 20 percent? Why? What happens to theprojected EFN if the retention ratio is increased? What if the retention ratio is decreased? What ifthe retention ratio is zero?

Common-Size Financials One tool of financial analysis is common-size financial statements.Why do you think common-size income statements and balance sheets are used? Note that theaccounting statement of cash flows is not converted into a common-size statement. Why do youthink this is?

Asset Utilization and EFN One of the implicit assumptions we made in calculating theexternal funds needed was that the company was operating at full capacity. If the company isoperating at less than full capacity, how will this affect the external funds needed?

Comparing ROE and ROA Both ROA and ROE measure profitability. Which one is more usefulfor comparing two companies? Why?

Ratio Analysis Consider the ratio EBITD/Assets. What does this ratio tell us? Why might it bemore useful than ROA in comparing two companies?

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10. Return on Investment A ratio that is becoming more widely used is return on investment.Return on investment is calculated as net income divided by long-term liabilities plus equity. Whatdo you think return on investment is intended to measure? What is the relationship between returnon investment and return on assets?Use the following information to answer the next five questions: A small business called TheGrandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit,and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so thecompany leased more space and expanded capacity, but it still could not keep up with demand.Equipment failed from overuse and quality suffered. Working capital was drained to expandproduction, and, at the same time, payments from customers were often delayed until the productwas shipped. Unable to deliver on orders, the company became so strapped for cash that employeepaychecks began to bounce. Finally, out of cash, the company ceased operations entirely threeyears later.11. 12. Product Sales Do you think the company would have suffered the same fate if its product hadbeen less popular? Why or why not?Cash Flow The Grandmother Calendar Company clearly had a cash flow problem. In thecontext of the cash flow analysis we developed in Chapter 2, what was the impact of customers notpaying until orders were shipped?Corporate Borrowing If the firm was so successful at selling, why wouldn’t a bank or someother lender step in and provide it with the cash it needed to continue?Cash Flow Which was the biggest culprit here: Too many orders, too little cash, or too littleproduction capacity?Cash Flow What are some actions a small company like The Grandmother Calendar Companycan take (besides expansion of capacity) if it finds itself in a situation in which growth in salesoutstrips production?13. 14. 15. Questions and Problems connect™BASIC (Questions 1–10)1. 2. Du Pont Identity If Roten, Inc., has an equity multiplier of 1.35, total asset turnover of 2.15,and a profit margin of 5.8 percent, what is its ROE?Equity Multiplier and Return on Equity Thomsen Company has a debt–equity ratio of .90.Return on assets is 10.1 percent, and total equity is $5,000. What is the equity multiplier? Returnon equity? Net income?Using the Du Pont Identity Y3K, Inc., has sales of $3,100, total assets of $1,580, and adebt–equity ratio of 1.20. If its return on equity is 16 percent, what is its net income?EFN The most recent financial statements for Martin, Inc., are shown here:3. 4. Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,841.40was paid, and Martin wishes to maintain a constant payout ratio. Next year’s sales are projected tobe $30,960. What external financing is needed?5.

Sales and Growth The most recent financial statements for Fontenot Co. are shown here:

Assets and costs are proportional to sales. The company maintains a constant 30 percentdividend payout ratio and a constant debt–equity ratio. What is the maximum increase in sales thatcan be sustained assuming no new equity is issued?6. 7.

Sustainable Growth If the Layla Corp. has a 15 percent ROE and a 10 percent payout ratio,what is its sustainable growth rate?

Sustainable Growth Assuming the following ratios are constant, what is the sustainablegrowth rate?

Total asset turnover = 1.90Profit margin = 8.1%Equity multiplier = 1.25Payout ratio = 30%

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Calculating EFN The most recent financial statements for Bradley, Inc., are shown here(assuming no income taxes):

Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Nextyear’s sales are projected to be $6,669. What is the external financing needed?9.

External Funds Needed Cheryl Colby, CFO of Charming Florist Ltd., has created the firm’s proforma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $390million. Current assets, fixed assets, and short-term debt are 20 percent, 120 percent, and 15percent of sales, respectively. Charming Florist pays out 30 percent of its net income in dividends.The company currently has $130 million of long-term debt and $48 million in common stock parvalue. The profit margin is 12 percent.1. 2.

Construct the current balance sheet for the firm using the projected sales figure.

Based on Ms. Colby’s sales growth forecast, how much does Charming Florist need inexternal funds for the upcoming fiscal year?

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Construct the firm’s pro forma balance sheet for the next fiscal year and confirm theexternal funds needed that you calculated in part (b).

Sustainable Growth Rate The Steiben Company has an ROE of 10.5 percent and a payoutratio of 40 percent.1. 2. 3.

What is the company’s sustainable growth rate?

Can the company’s actual growth rate be different from its sustainable growth rate? Whyor why not?

How can the company increase its sustainable growth rate?

INTERMEDIATE (Questions 11–23)

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Return on Equity Firm A and Firm B have debt–total asset ratios of 40 percent and 30percent and returns on total assets of 12 percent and 15 percent, respectively. Which firm has agreater return on equity?

Ratios and Foreign Companies Prince Albert Canning PLC had a net loss of £15,834 on salesof £167,983. What was the company’s profit margin? Does the fact that these figures are quoted ina foreign currency make any difference? Why? In dollars, sales were $251,257. What was the netloss in dollars?

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External Funds Needed The Optical Scam Company has forecast a 20 percent sales growthrate for next year. The current financial statements are shown here:

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Using the equation from the chapter, calculate the external funds needed for next year.Construct the firm’s pro forma balance sheet for next year and confirm the external fundsneeded that you calculated in part (a).

Calculate the sustainable growth rate for the company.

Can Optical Scam eliminate the need for external funds by changing its dividend policy?What other options are available to the company to meet its growth objectives?

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Days’ Sales in Receivables A company has net income of $205,000, a profit margin of 9.3percent, and an accounts receivable balance of $162,500. Assuming 80 percent of sales are oncredit, what is the company’s days’ sales in receivables?

Ratios and Fixed Assets The Le Bleu Company has a ratio of long-term debt to total assets of.40 and a current ratio of 1.30. Current liabilities are $900, sales are $5,320, profit margin is 9.4percent, and ROE is 18.2 percent. What is the amount of the firm’s net fixed assets?

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Calculating the Cash Coverage Ratio Titan Inc.’s net income for the most recent year was$9,450. The tax rate was 34 percent. The firm paid $2,360 in total interest expense and deducted$3,480 in depreciation expense. What was Titan’s cash coverage ratio for the year?

Cost of Goods Sold Guthrie Corp. has current liabilities of $270,000, a quick ratio of 1.1,inventory turnover of 4.2, and a current ratio of 2.3. What is the cost of goods sold for thecompany?

Common-Size and Common–Base Year Financial Statements In addition to common-size financial statements, common–base year financial statements are often used. Common–baseyear financial statements are constructed by dividing the current year account value by the baseyear account value. Thus, the result shows the growth rate in the account. Using the followingfinancial statements, construct the common-size balance sheet and common–base year balancesheet for the company. Use 2009 as the base year.

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Use the following information for Problems 19, 20, and 22:

The discussion of EFN in the chapter implicitly assumed that the company was operating at fullcapacity. Often, this is not the case. For example, assume that Rosengarten was operating at 90percent capacity. Full-capacity sales would be $1,000/.90 = $1,111. The balance sheet shows$1,800 in fixed assets. The capital intensity ratio for the company is

Capital intensity ratio = Fixed assets/Full-capacity sales = $1,800/$1,111 = 1.62

This means that Rosengarten needs $1.62 in fixed assets for every dollar in sales when itreaches full capacity. At the projected sales level of $1,250, it needs $1,250 × 1.62 = $2,025 in

fixed assets, which is $225 lower than our projection of $2,250 in fixed assets. So, EFN is only $565– 225 = $340.19.

Full-Capacity Sales Thorpe Mfg., Inc., is currently operating at only 85 percent of fixed assetcapacity. Current sales are $630,000. How much can sales increase before any new fixed assets areneeded?

Fixed Assets and Capacity Usage For the company in the previous problem, suppose fixedassets are $580,000 and sales are projected to grow to $790,000. How much in new fixed assetsare required to support this growth in sales?

Calculating EFN The most recent financial statements for Moose Tours, Inc., appear below.Sales for 2010 are projected to grow by 20 percent. Interest expense will remain constant; the taxrate and the dividend payout rate will also remain constant. Costs, other expenses, current assets,fixed assets, and accounts payable increase spontaneously with sales. If the firm is operating at fullcapacity and no new debt or equity is issued, what external financing is needed to support the 20percent growth rate in sales?

Capacity Usage and Growth In the previous problem, suppose the firm was operating at only80 percent capacity in 2009. What is EFN now?

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Calculating EFN In Problem 21, suppose the firm wishes to keep its debt–equity ratioconstant. What is EFN now?

CHALLENGE (Questions 24–30)

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EFN and Internal Growth Redo Problem 21 using sales growth rates of 15 and 25 percent inaddition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, anduse this graph to determine the relationship between them.

EFN and Sustainable Growth Redo Problem 23 using sales growth rates of 30 and 35

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percent in addition to 20 percent. Illustrate graphically the relationship between EFN and thegrowth rate, and use this graph to determine the relationship between them.26. Constraints on Growth Bulla Recording, Inc., wishes to maintain a growth rate of 12 percentper year and a debt–equity ratio of .30. Profit margin is 5.9 percent, and the ratio of total assets tosales is constant at .85. Is this growth rate possible? To answer, determine what the dividendpayout ratio must be. How do you interpret the result?EFN Define the following:27. Show that EFN can be written as: EFN = – PM(S)b + [A – PM(S)b] × gg).28. Hint: Asset needs will equal A × g. The addition to retained earnings will equal PM(S)b × (1 +Sustainable Growth Rate Based on the results in Problem 27, show that the internal andsustainable growth rates can be calculated as shown in Equations 3.23 and 3.24. Hint: For theinternal growth rate, set EFN equal to zero and solve for g.Sustainable Growth Rate In the chapter, we discussed one calculation of the sustainablegrowth rate as: In practice, probably the most commonly used calculation of the sustainable growth rate isROE × b. This equation is identical to the sustainable growth rate equation presented in thechapter if the ROE is calculated using the beginning of period equity. Derive this equation from theequation presented in the chapter.29. 30. Sustainable Growth Rate Use the sustainable growth rate equations from the previousproblem to answer the following questions. No Return, Inc., had total assets of $310,000 andequity of $183,000 at the beginning of the year. At the end of the year, the company had totalassets of $355,000. During the year the company sold no new equity. Net income for the year was$95,000 and dividends were $68,000. What is the sustainable growth rate for the company? Whatis the sustainable growth rate if you calculate ROE based on the beginning of period equity?S&P Problemswww.mhhe.com/edumarketinsight1. Calculating the Du Pont Identity Find the annual income statements and balance sheets forDow Chemical (DOW) and AutoZone (AZO). Calculate the Du Pont identity for each company forthe most recent three years. Comment on the changes in each component of the Du Pont identityfor each company over this period and compare the components between the two companies. Arethe results what you expected? Why or why not?2.

Ratio Analysis Find and download the “Profitability” spreadsheet for Southwest Airlines (LUV)and Continental Airlines (CAL). Find the ROA (Net ROA), ROE (Net ROE), PE ratio (P/E—high andP/E—low), and the market-to-book ratio (Price/Book—high and Price/Book—low) for eachcompany. Because stock prices change daily, PE and market-to-book ratios are often reported asthe highest and lowest values over the year, as is done in this instance. Look at these ratios forboth companies over the past five years. Do you notice any trends in these ratios? Which companyappears to be operating at a more efficient level based on these four ratios? If you were going toinvest in an airline, which one (if either) of these companies would you choose based on thisinformation? Why?

Sustainable Growth Rate Use the annual income statements and balance sheets under the“Excel Analytics” link to calculate the sustainable growth rate for Coca-Cola (KO) each year for thepast four years. Is the sustainable growth rate the same for every year? What are possible reasonsthe sustainable growth rate may vary from year to year?

External Funds Needed Look up Black & Decker (BDK). Under the “Financial Highlights” linkyou can find a five-year growth rate for sales. Using this growth rate and the most recent incomestatement and balance sheet, compute the external funds needed for BDK next year.

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Mini Case: RATIOS AND FINANCIAL PLANNING AT EAST COASTYACHTS

Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financialplanning and also to evaluate the company’s financial performance. Dan graduated from college fiveyears ago with a finance degree, and he has been employed in the treasury department of a Fortune 500company since then.

East Coast Yachts was founded 10 years ago by Larissa Warren. The company’s operations arelocated near Hilton Head Island, South Carolina, and the company is structured as an LLC. The companyhas manufactured custom midsize, high-performance yachts for clients over this period, and its productshave received high reviews for safety and reliability. The company’s yachts have also recently receivedthe highest award for customer satisfaction. The yachts are primarily purchased by wealthy individualsfor pleasure use. Occasionally, a yacht is manufactured for purchase by a company for businesspurposes.

The custom yacht industry is fragmented, with a number of manufacturers. As with any industry,there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominatesthe market. The competition in the market, as well as the product cost, ensures that attention to detail isa necessity. For instance, East Coast Yachts will spend 80 to 100 hours on hand-buffing the stainlesssteel stem-iron, which is the metal cap on the yacht’s bow that conceivably could collide with a dock oranother boat.

To get Dan started with his analyses, Larissa has provided the following financial statements. Danhas gathered the industry ratios for the yacht manufacturing industry.

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Calculate all of the ratios listed in the industry table for East Coast Yachts.

Compare the performance of East Coast Yachts to the industry as a whole. For each ratio,comment on why it might be viewed as positive or negative relative to the industry. Suppose youcreate an inventory ratio calculated as inventory divided by current liabilities. How do you interpretthis ratio? How does East Coast Yachts compare to the industry average?

Calculate the sustainable growth rate of East Coast Yachts. Calculate external funds needed(EFN) and prepare pro forma income statements and balance sheets assuming growth at preciselythis rate. Recalculate the ratios in the previous question. What do you observe?

As a practical matter, East Coast Yachts is unlikely to be willing to raise external equity capital,in part because the owners don’t want to dilute their existing ownership and control positions.However, East Coast Yachts is planning for a growth rate of 20 percent next year. What are yourconclusions and recommendations about the feasibility of East Coast’s expansion plans?

Most assets can be increased as a percentage of sales. For instance, cash can be increased byany amount. However, fixed assets often must be increased in specific amounts because it isimpossible, as a practical matter, to buy part of a new plant or machine. In this case a companyhas a “staircase” or “lumpy” fixed cost structure. Assume that East Coast Yachts is currentlyproducing at 100 percent of capacity. As a result, to expand production, the company must set upan entirely new line at a cost of $30 million. Calculate the new EFN with this assumption. Whatdoes this imply about capacity utilization for East Coast Yachts next year?

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