Q1. Anaconda Inc. has decided against borrowing and to have all its assets financed by equity. Further, it intends to keep its payout ratio at 40%. Its asset turnover ratio is 0.9, its profit margin is 8% and its profits are taxed at 40%. The firm's target growth rate is 5%.
A) Is the target growth rate consistent with firm's financing policy?
B) If not, how much does it need to increase the asset turnover ratio or profit margin to meet the target growth rate?
C) Explain what happens if Anaconda Inc. cannot close the gap between its sustainable growth rate and target growth rate.
Q2. Based on the following balance sheet and income statement, calculate the free cash flows generated by Magna as of end of December 31, 2010. When you calculate free cash flows please use actual taxes paid by Magna rather than using a short cut.
Magna Fax, Inc,
Income Statement for the Year ending December 31st, 2010
|
Sales Revenue
|
|
|
|
$150,000
|
|
Cost of Goods Sold
|
|
|
|
$117,500
|
|
Gross Profits
|
|
|
|
$32,500
|
|
|
Selling Expenses
|
|
$4,500
|
|
|
|
General and Admin. Expenses
|
$4,000
|
|
|
|
Depreciation Expense
|
$4,000
|
|
|
Operating Profits
|
|
|
|
$20,000
|
|
Interest Expense
|
|
|
|
$2,500
|
|
Net Profit before Taxes
|
|
|
$17,500
|
|
Taxes (40%)
|
|
|
|
$7,000
|
|
Net Profit after Taxes
|
|
|
$10,500
|
Magna Fax, Inc., Balance Sheet
For the Years Ended December 31, 2009 and 2010
|
|
|
|
|
2010
|
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$24,000
|
|
|
$21,000
|
|
Accounts Receivable
|
|
$45,000
|
|
|
$39,000
|
|
Inventory
|
|
|
$30,000
|
|
|
$27,000
|
|
|
Gross fixed Assets
|
$42,000
|
|
|
$40,000
|
|
|
|
Acc. Depreciation
|
$22,000
|
|
|
$18,000
|
|
|
Net fixed assets
|
|
|
$20,000
|
|
|
$22,000
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
Accounts Payable
|
|
|
$25,000
|
|
|
$30,000
|
|
Notes Payable
|
|
|
$50,000
|
|
|
$40,000
|
|
Accruals
|
|
|
|
$1,000
|
|
|
$2,000
|
|
Long-term Debts
|
|
|
$10,000
|
|
|
$8,000
|
|
Common Stock at par
|
|
$1,000
|
|
|
$1,000
|
|
Paid-in Capital in excess of par
|
$4,000
|
|
|
$4,000
|
|
Retained Earnings
|
|
|
$28,000
|
|
|
$24,000
|
|
Total Liabilities and Equity
|
|
$119,000
|
|
|
$109,000
|