Problem 1:
Carter Corporation's sales are expected to increase from $5 million in problems 2008 to $6 million in 2009, or by 20%. Its assets totaled $3 million at the end of 2008. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2008, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 5%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.
Problem 2:
Walter Industries has $5 billion in sales and $1.7 billion in fixed assets. Currently, the company's fixed assets are operating at 90% of capacity.
a. What level of sales could Walter Industries have obtained if it had been operating at full capacity?
b. What is Walter's Target fixed assets/Sales ratio?
c. If Walter's sales increase 12%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio?
Problem 3:
PRO FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):
Sales $3,000
Operating costs excluding depreciation 2,450
EBITDA $ 550
Depreciation 250
EBIT $ 300
Interest 125
EBT 175
Taxes (40%) 70
Net income $ 105
Looking ahead to the following year, the company's CFO has assembled this information:
- Year-end sales are expected to be 10% higher than the $3 billion in sales generated last year.
- Year-end operating costs, excluding depreciation, are expected to equal 80% of year end sales.
- Depreciation is expected to increase at the same rate as sales.
- Interest costs are expected to remain unchanged.
- The tax rate is expected to remain at 40%.
On the basis of that information, what will be the forecast for Roberts' year-end net income?
Problem 4:
REGRESSION AND RECEIVABLES Edwards Industries has $320 million in sales. The company expects that its sales will increase 12% this year. Edwards' CFO uses a simple linear regression to forecast the company's receivables level for a given level of projected sales. On the basis of recent history, the estimated relationship between receivables and sales (in millions of dollars) is as follows:
Receivables = $9.25 + 0.07(Sales)
Problem 5:
OPTIONS A call option on Bedrock Boulders stock has a market price of $7. The stock sells for $30 a share, and the option has an exercise price of $25 a share.
a. What is the exercise value of the call option?
b. What is the premium on the option?
Problem 6:
The exercise price on one of Flanagan Company's call options is $15, its exercise value is $22, and its premium is $5. What are the option's market value and the stock's current price?