FIN 300 Lecture Notes - Lecture 3: Capital Intensity, Dividend Payout Ratio, Capital Structure

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jadeserval343

15 Feb 2017

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Goal of a manager is to maximize shareholder value/stock price. 6 concepts of finance: time value of money, risk/return, cash/cash flow esp. cash flow from the assets, future & forecasting, market efficiency, people. Beginning assumption: all costs and all assets are a constant % of sales. Start with income statement, then move to assets side of balance sheet, then forecast the debt & equity side. If sales go up a certain %, then everything else also goes up that % Scenario 1: maintain a constant dividend payout ratio (dividends/net income) Use % change in sales to forecast everything until dividends: ni dividends will be the contribution to equity (note: equity does. Not go up by the same %, must subtract the new equity from the debt. + equity calculated with that %: due to this ^ capital structure will change; debt:assets ratio changes.

Related Questions

Use the below information to answer the following question.

Income Statement
For the Year
Sales	$42,700
Cost of goods sold	29,250
Depreciation	3,750

Earnings before interest and taxes	$ 9,700
Interest paid	1,360

Taxable income	$ 8,340
Taxes	2,840

Net income	$ 5,500

Dividends $1,925

Balance Sheet
End-of-Year
Cash	$1,320
Accounts receivable	3,780
Inventory	10,200

Total current assets	$15,300
Net fixed assets	33,600

Total assets	$48,900

Accounts payable	$ 3,650
Long-term debt	18,100
Common stock ($1 par value)	15,000
Retained earnings	12,150

Total Liab. & Equity	$48,900

The profit margin, the debt-equity ratio, and the dividend payout ratio for this firm are constant. Sales are expected to increase by $5,000 next year. What is the projected addition to retained earnings for next year?

ochrerhinoceros954

(ALL WORK MUST BE DONE ON EXCEL)

Build a financial model on the following template. Assume that the WACC is 20%. Also assume the debt and equity remain the same. The FCF long-term growth rate is the same as the sales growth rate. ( Copy the table into Excel.)

Sales growth	10%
Current assets/sales	15%
Current liabilities/Sales	8%
Net fixed assets/sales	77%
cost of goods sold/sales	50%
depreciation rate	10%
interest rate on debt	10%
interest paid on cash and marketable securities	8%
tax rate	40%
dividend payout ratio	40%

Year	0	1	2	3	4	5
income statement
sales	1000
cost of goods sold	500
interest payment on debt	32
interest earned on cash and marketable securities	6
depreciation	100
profits before tax	374
taxes	150
profits after tax	225
dividends	90
retained earnings	135

Balance sheet
cash and marketable securities	80
current assets	150
fixed assets
At cost	1070
depreciation	300
Net fixed assets	770
total assets	1000

current liabilities	80
debt	320
stock	450
accumulated retained earnings	150
total liabilities + Equity	1000

a. Value the companyâs equity. (SHOW YOUR WORK ON EXCEL)

b. The model in Part A includes cost of goods sold but not selling, general, and administrative (SG & A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. Change the model to accommodate this new assumption. Show the resulting income statements, balance sheets, the free cash flows (FCF), and the valuation. (SHOW YOUR WORK ON EXCEL)

c. Build a data table in which you show the sensitivity of the equity value to the level of SG & A. Let SG & A vary from $0 per year to $600 per year. (SHOW YOUR WORK ON EXCEL)

d. Back to Part A. Suppose that the fixed assets at cost follow the following step function:

Incorporate this function into the model and solve for the market value of equity. (SHOW YOUR WORK ON EXCEL)

e. Back to Part A again. Make two changes in the model: 1). Let debt be the plug and keep cash constant at its year-0 level. 2). Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of $0.15. In addition, suppose that it wants this dividend per share to growth in subsequent years by 12% per year. Incorporate these changes into the pro forma model and solve this model to get the market value of equity per share. (SHOW YOUR WORK ON EXCEL)

violetsardine902

Please show formulas and calculations and not just results and numbers, and explain rationale for answers.

You have the following information for Small Inc. for the current year (Y0). Assume there are 50M shares outstanding.

Income Statement (M$)	Y0	Y1
Sales	1400
Cost of Goods Sold	700
SG&A	200
Depreciation	100
Earnings Before Interest & Tax (EBIT)	400
Interest Expense	40
Earnings Before Tax	360
Taxes (40%)	144
Net Income	216
Dividends	100

Balance Sheet (M$)	Y0	Y1
Cash	100
Accounts Receivable	300
Inventories	500
Current Assets	900
Gross PPE	400
Accumulated Depn	300
Net Fixed Assets	100
TOTAL ASSETS	1,000
Accruals	25
Accounts Payable	150
Notes Payable	75
Current Liabilities	250
Long Term Debt	350
Common Stock	100
Retained Earnings	300
Total Liability & Equity	1,000

1. Forecast the income statement and balance sheet for Y1. Assume: Sales and accounts receivable grow by 25%; cost of goods sold, inventory and accounts payable grow 20%; and SG&A grows 10%. Interest expense will fall to 25M. The following accounts will not change (same dollar amount): depreciation expense, dividends, cash, accruals, notes payable, long-term debt, common stock. The firm will need 150M more in gross PPE. Use the cash account to balance the balance sheet.

2. Estimate the stock price for Small Inc. using discounted cash flows. Assume Small Inc. grows at 5% after year 1, the cost of capital is 15% and cash is a non-operating asset.You will need the free cash flow for year 1 and the horizon value as part of the solution.

3. Large Inc. has a forward P-E multiple of 4.5x.Use this to estimate the stock price for Small Inc..

jadechinchilla39

FIN 300 Lecture Notes - Lecture 3: Capital Intensity, Dividend Payout Ratio, Capital Structure

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