FIN 350 Lecture Notes - Lecture 3: Current Liability, Capital Budgeting, Capital Structure

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indigolion532

20 May 2018

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1. What long-term investment should the firm choose?

2. How should the firm raise funds for the selected investment?

3. How should short-term assets be managed and financed?

Balance Sheet

a financial snapshot of the firm and its activities at a single point in time.

Fixed Assets

those that will last a long time, such as buildings. Some fixed assets are tangible, such as machinery and

equipment. Other fixed assets are intangible, such as patents and trademarks.

Current Assets

comprises those that have short lives, such as inventory.

Current Liability

Also known as short-term debt, loans and other obligations that must be repaid within one year.

Shareholders' equity

represents the difference between the value of the assets and the debt of the firm. In this sense, it is a

residual claim on the firm's assets.

Capital budgeting

The decision-making process for accepting or rejecting projects.

Capital structure

The mix of the various debt and equity capital maintained by a firm.

Net working capital

Current assets minus current liabilities.

Financial Manager

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Document Summary

Balance sheet a financial snapshot of the firm and its activities at a single point in time. Fixed assets those that will last a long time, such as buildings. Some fixed assets are tangible, such as machinery and equipment. Other fixed assets are intangible, such as patents and trademarks. Current assets comprises those that have short lives, such as inventory. Also known as short-term debt, loans and other obligations that must be repaid within one year. Shareholders" equity represents the difference between the value of the assets and the debt of the firm. In this sense, it is a residual claim on the firm"s assets. The decision-making process for accepting or rejecting projects. The mix of the various debt and equity capital maintained by a firm. Financial manager: selecting value creating projects, making smart financing decisions. Treasurer responsible for handling cash flows, managing capital expenditure decisions, and making financial plans.

Related Questions

Here is your first question:

Explain what current assets and fixed assets are and give as many examples as you can for each. What is the difference between tangible and intangible assets?

Liabilities and owner's equity are listed on the right-hand side respectively. Liabilities are also classified as current liabilities and long-term liabilities.

Here is your second question:

Explain what current liabilities differ from long-term liabilities and give as many examples as you can for each.

Owner's equity (also known as shareholders' equity, common equity) is the difference between total value of assets and total value of liabilities. That is, if you were to use your assets to pay off the debts, whatever is left over (the residual) would belong to shareholders. That is why they are known as residual claimants. Hence we have the identity;

Assets = Liabilities + Shareholders' equity

Net working capital is simply equal to current assets minus current liabilities. When net working capital is positive, it means cash that will be available over the next 12 months exceeds what must be paid. It is important for a healthy firm to have positive net working capital.

Here is your third question:

A firm has current assets of $100, net fixed assets of $500, short-term debt of $70 and long-term debt of $200. What is shareholders' equity. Construct a balance sheet

for this company. Is net working capital positive or negative? If so by how much? (Hint: You may utilize Example 2.1 on page 24 of the textbook).

Using the 2005 and 2006 Statement of Financial Position (SFP) and the Statement of Earnings (SE) found on pages 465 and 466, complete a vertical analysis (common-sized statements) for both years and a horizontal analysis (trend) from 2005 to 2006.Please show work.......thanks

Table13:1

Bayside Memorial Hospital Statements of Operations (Income Statements) Years Ended December 31, 2006 and 2005 (Thousands of dollars 2006 2005

Net Patient Service Revenue $108,600 $97,393

Premium revenue 5,232 4,622

Other revenue $ 3,644 6,014

Total revenues $117,476 $108,029

Expense:

Nursing Services $58,245 56,752

Dietary Services 5,424 4,718

General services 13,198 11,655

Administrative services 11,427 11,585

Employee health and welfare 10,250 10,705

Provision for uncollectible 3,328 3,469

Provision for malpractice 1,320 1,204

Depreciation 4,130 4,025

Interest expense 1,542 1,521

Total Expense $108,904 $105,634

Net Income $8,572 $2,395

Balance Sheet

Table 13.2 contains Bay sideâs 2005 and 2006 balance sheets. Although the assets are all stated in terms of dollars, only cash represents actual money we see that bayside can if it liquidated its short-term investment securities. Write checks at the end of 2006 for a total $6,263,000 (verse total current liabilities of $13,332,000 due during 2006). The noncash current assets will presumably be converted to cash within a year, but they do not represent cash on hand.

Then Claims against assets are two types: 1) liabilities, or money the firm owes, and 2) equity, also called net assets or fund capital. Equity is a residual, so for 2006

Assets -Liabilities = Equity

151,278,000 - ($13,332,000+$30,582,000) =$107,364,000

Liabilities consist of $(13,332,000 of current liabilities plus $30,582,000of long-term liabilities. If assets decline in value-suppose some of Baysideâ s fixed assets were sold at less that book value-liabilities remain constant, so the value of the equity capital declines.

Table 13:2 Bayside Memorial Hospital Balance Sheets December 31, 2006 and 2005 (thousand of dollars)

2006 2005

Cash $4,263 $5,095

Short-term investments 2,000 0

Accounts receivable 21,840 20,738

Inventories 3,177 2,982

Total current assets $31,280 $28,815

Gross plant and equipment $145,168 $140,865

Accumulated depreciations 25,160 21,030

Net plant and equipment $119,998 $119,835

Total assets $151,278 $148,650

Accounts payable $4,707 $5,145

Accrued expenses 5,650 5,421

Notes payable 825 4,237

Current portion of long-term debt 2,150 2,000

Total current liabilities $13,332 $16,803

Long-term debt $28,750 $30,900

Capital lease obligations 1,832 2,155

Total long-term liabilities $30,582 $33,055

Net assets (equity) $107,364 $98,792

Total liabilities and net assets $151,278 $148,650

Additional funds needed

Morrissey Technologies Inc.'s 2012 financial statements are shown here.

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2012
Cash	$180,000	Accounts payable	$360,000
Receivables	360,000	Notes payable	56,000
Inventories	720,000	Accrued liabilities	180,000
Total current assets	$1,260,000	Total current liabilities	$596,000
		Long-term debt	100,000
Fixed assets	1,440,000	Common stock	1,800,000
		Retained earnings	204,000
Total assets	$2,700,000	Total liabilities and equity	$2,700,000

Morrissey Technologies Inc.: Income Statement for December 31, 2012
	Sales	$3,600,000
	Operating costs including depreciation	3,279,720
	EBIT	$320,280
	Interest	20,280
	EBT	$300,000
	Taxes (40%)	120,000
	Net Income	$180,000
	Per Share Data:
	Common stock price	$45.00
	Earnings per share (EPS)	$1.80
	Dividends per share (DPS)	$1.08

Suppose that in 2013, sales increase by 15% over 2012 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2012 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its Operating costs/Sales ratio to 89.5% and increase its total debt-to-assets ratio to 30%. (It believes that its current debt ratio is too low relative to the industry average.) The firm will raise 30% of 2013 forecasted total debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short-term and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent.

Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2013
	2012	2013 Pro Forma
Sales	$3,600,000	$
Operating costs (includes depreciation)	3,279,720	$
EBIT	$320,280	$
Interest expense	20,280	$
EBT	$300,000	$
Taxes (40%)	120,000	$
Net Income	$180,000	$
Dividends	$	$
Addition to RE	$	$

Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2013
	2012	2013 Pro Forma
Cash	$180,000	$
Accounts receivable	360,000	$
Inventories	720,000	$
Fixed assets	1,440,000	$
Total assets	$2,700,000	$
Payables + accruals	$540,000	$
Short-term bank loans	56,000	$
Total current liabilities	$596,000	$
Long-term bonds	100,000	$
Total debt	$696,000	$
Common stock	1,800,000	$
Retained earnings	204,000	$
Total common equity	$2,004,000	$
Total liab. and equity	$2,700,000	$

If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In otherwords, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places.
%

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FIN 350 Lecture Notes - Lecture 3: Current Liability, Capital Budgeting, Capital Structure

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