Finance and Accounting,
1. Cash Flow. Ritter Corporation’s accountants prepared the following
financial statements for year-end 2006.
Ritter Corporation
Income Statement
(thousands)
2001
Revenue $500
Expenses $300
Depreciation $75
Operating income $125
interest expense $10
Profit before tax $115
Tax (.40) $46
Net income $82
Dividends $9
Ritte’r Corporation
Balance Sheets
December 31
m 29.9.5.
Assets
Cash $45 $10
Other current assets $145 $120
Net fixed assets 5% $1_S_O
Total assets $440 $280
Liabilities and Equity
Current liabilities $70 $60
Long-term debt $90 $0
Stockholders’ equity $280 $220
Total liabilities and equity $440 $280
a. Estimate the Cash Flow Identity Equation for 2006.
b. What does this analysis tell you about the operation and the benefits
generated for investors?
2. DuPont Analysis and Return on Equity, Thomsen Company has a debt-
equity ratio of 1.40. Return on assets is 8.7 percent, and total equity is
$520,000.
a. Estimate the equity multiplier? Return on equity? Total Asset Turnover?
b. Identify and explain two operating strategies that would lead to
improvement in the Return on Equity figure. 3
3. Sustainable Growth.
a. Assuming the following ratios are constant, what is the sustainable
growth rate?
Total asset turnover = 1.40
Profit margin = 7.5%
Equity multiplier = 1.50
Payout ratio = 40%
b. What are the financial implications if a company expects to grow annual
sales at a rate that exceeds the sustainable growth rate?
4. Financial Forecasting. The Optical Scam Company has forecast a 20 percent
sales growth rate for next year. The current year-end financial statements
are shown below. Assume that Optical Scam is operating at full capacity
currently.
Optical Scam Company
income Statement Place answer in this
column for 4a.
Sales 038,000,000
Costs Li._L__33 400 000
Taxable income $4,600,000
Taxes 0_,_i__1610 000
Net income $2,990,000
Dividends $1,195,000
Additions to retained
earnings $1,794,000
Balance Sheet
Assets
Current assets $9,000,000
Fixed assets 522,000,000
Total Assets $31,000,000
Liabilities and Equity
Short-term debt $8,000,000
Long-term debt $6,000,000
Common stock $4,000,000
Accumulated retained
earnings $13,000,000
Total equity $17,000,000
Total liabilities and equity $31,000,000
3. Construct the firm’s pro forma balance sheet for next year, given the 20%
sales growth target.
b. Can Optical Scam eliminate the need for external funds by changing its
dividend policy? (10 points)
c. Assume that Optical Scam was operating at 80% capacity last year. How
does that change your answer in part (a)? (10 points) E
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