Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 14, Problem 8SP
(Financial forecasting—discretionary financing needs) The most recent
Armadillo Dog Biscuit Co. Inc., ($ Millions)
The firm’s net profits were 6 percent of the current year’s sales but are expected to rise to 7 percent of next year’s sales. To help support its anticipated growth in asset needs next year, the firm has suspended plans to pay cash dividends to its stockholders. In past years a $1.50-per-share dividend has been paid annually. Armadillo’s accounts payable and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds needed to finance next year’s operations that are not forthcoming from other sources.
- a. Fill in the table and project the firm’s needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needs.
- b. Compare Armadillo’s current ratio (current assets/current liabilities) and debt ratio (total liabilities/total assets) before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of Armadillo’s financial condition?
- c. What difference, if any, would have resulted if Armadillo’s sales had risen to $6 million in 1 year and $7 million only after 2 years? Discuss only; no calculations are required.
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Chapter 14 Solutions
Foundations Of Finance
Ch. 14 - Prob. 1RQCh. 14 - Discuss the shortcomings of the percent of sales...Ch. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 1SPCh. 14 - Prob. 2SPCh. 14 - (Financial forecastingdiscretionary financing...Ch. 14 - (Financial forecastingpercent of sales) Next years...Ch. 14 - Prob. 5SPCh. 14 - (Percent of sales forecasting) Which of the...
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