FIN 3100 Lecture Notes - Lecture 1: Financial Statement, Market Liquidity, Retained Earnings
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FSU Manufacturing, Inc. has the following financial statements data for 2014:
| Income Statement | Balance Sheet | |||
| Sales | $102,500 | Cash | $40,000 | |
| Cost of Goods | $50,000 | Fixed Assets | $55,000 | |
| SG&E Expenses | $35,000 | Total Assets | $95,000 | |
| EBIT | $17,500 | Accounts Payable | $12,000 | |
| Interest Expense | $2,500 | Long-term Debt | $25,000 | |
| Taxes | $6,000 | Retained Earnings | $28,000 | |
| Net Income | $9,000 | Paid-in Common Equity | $30,000 |
| Trait 1 | Use of financial statements | ||
| 1. | |||
| a. | Compute the firm’s debt ratio and current ratio. | ||
| b. | Is the firm profitable? Does the balance sheet balance? Explain. | ||
| c. | If the firm paid $5,000 in dividends in 2014, what was its retained earnings balance at the end of 2013? (20 points) | ||
| Trait 2 | Student relates financial ratios to improved business decisions | ||
| 2. | |||
| a. | Compute the firm’s net profit margin, total asset turnover, and financial leverage multiplier (also known as the equity multiplier). | ||
| b. | Explain what each of the three ratios above tells you about the firm’s performance and how they combine to form the firm’s return on equity. | ||
| c. | The financial data for the firm’s major competitors show on average a net profit margin of 16%, total asset turnover of 1.25, but comparable leverage. Identify some possible business decisions that the firm could make so that it would be as attractive an investment as its competitors. | ||
| The following is the financial statement of Executive Fruit Company for the year ended December 2014. |
| INCOME STATEMENT, 2014 | |||
| (Figures in $ Thousands) | |||
| Revenue | $ | 5,500 | |
| Cost of goods sold | 4,950 | ||
| EBIT | $ | 550 | |
| Interest | 110 | ||
| Earnings before taxes | $ | 440 | |
| State and federal tax | 176 | ||
| Net income | $ | 264 | |
| Dividends | 176 | ||
| Additions to retained earnings | $ | 88 | |
| BALANCE SHEET (Year-End, 2014) | |||
| (Figures in $ Thousands) | |||
| Assets | |||
| Net working capital | $ | 550 | |
| Fixed assets | 2,200 | ||
| Total assets | $ | 2,750 | |
| Liabilities and shareholders' equity | |||
| Long-term debt | $ | 1,100 | |
| Shareholders' equity | 1,650 | ||
| Total liabilities and shareholders' equity | $ | 2,750 | |
| The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. |
| First stage pro forma statements: |
| PRO FORMA INCOME STATEMENT, 2015 | |||
| (Figures in $ Thousands) | |||
| Revenue | $ | 6,050 | |
| Cost of goods sold | 5,445 | ||
| EBIT | $ | 605 | |
| Interest | 110 | ||
| Earnings before taxes | $ | 495 | |
| State and federal tax | 198 | ||
| Net income | $ | 297 | |
| Dividends | 198 | ||
| Additions to retained earnings | $ | 99 | |
| PRO FORMA BALANCE SHEET (Year-End, 2015) | |||
| (Figures in $ Thousands) | |||
| Assets | |||
| Net working capital | $ | 605 | |
| Fixed assets | 2,420 | ||
| Total assets | $ | 3,025 | |
| Liabilities and shareholders' equity | |||
| Long-term debt | $ | 1,100 | |
| Shareholders' equity | 1,749 | ||
| Total liabilities and shareholders' equity | $ | 2,849 | |
| Required external financing | $ | 176 | |
| Second stage pro forma balance sheet: |
| PRO FORMA BALANCE SHEET (Year-End, 2015) | |||
| (Figures in $ Thousands) | |||
| Assets | |||
| Net working capital | $ | 605 | |
| Fixed assets | 2,420 | ||
| Total assets | $ | 3,025 | |
| Liabilities and shareholders' equity | |||
| Long-term debt | $ | 1,276 | |
| Shareholders' equity | 1,749 | ||
| Total liabilities and shareholders' equity | $ | 3,025 | |
| How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.) |
| Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ . |
| The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.): |
| Long-term debt | $ |
| Shareholders' equity | |
| Total | $ |
| The following is the financial statement of Executive Fruit Company for the year ended December 2014. |
| INCOME STATEMENT, 2014 | |||
| (Figures in $ Thousands) | |||
| Revenue | $ | 4,000 | |
| Cost of goods sold | 3,600 | ||
| EBIT | $ | 400 | |
| Interest | 80 | ||
| Earnings before taxes | $ | 320 | |
| State and federal tax | 128 | ||
| Net income | $ | 192 | |
| Dividends | 128 | ||
| Additions to retained earnings | $ | 64 | |
| BALANCE SHEET (Year-End, 2014) | |||
| (Figures in $ Thousands) | |||
| Assets | |||
| Net working capital | $ | 400 | |
| Fixed assets | 1,600 | ||
| Total assets | $ | 2,000 | |
| Liabilities and shareholders' equity | |||
| Long-term debt | $ | 800 | |
| Shareholders' equity | 1,200 | ||
| Total liabilities and shareholders' equity | $ | 2,000 | |
| The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. |
| First stage pro forma statements: |
| PRO FORMA INCOME STATEMENT, 2015 | |||
| (Figures in $ Thousands) | |||
| Revenue | $ | 4,400 | |
| Cost of goods sold | 3,960 | ||
| EBIT | $ | 440 | |
| Interest | 80 | ||
| Earnings before taxes | $ | 360 | |
| State and federal tax | 144 | ||
| Net income | $ | 216 | |
| Dividends | 144 | ||
| Additions to retained earnings | $ | 72 | |
| PRO FORMA BALANCE SHEET (Year-End, 2015) | |||
| (Figures in $ Thousands) | |||
| Assets | |||
| Net working capital | $ | 440 | |
| Fixed assets | 1,760 | ||
| Total assets | $ | 2,200 | |
| Liabilities and shareholders' equity | |||
| Long-term debt | $ | 800 | |
| Shareholders' equity | 1,272 | ||
| Total liabilities and shareholders' equity | $ | 2,072 | |
| Required external financing | $ | 128 | |
| Second stage pro forma balance sheet: |
| PRO FORMA BALANCE SHEET (Year-End, 2015) | |||
| (Figures in $ Thousands) | |||
| Assets | |||
| Net working capital | $ | 440 | |
| Fixed assets | 1,760 | ||
| Total assets | $ | 2,200 | |
| Liabilities and shareholders' equity | |||
| Long-term debt | $ | 928 | |
| Shareholders' equity | 1,272 | ||
| Total liabilities and shareholders' equity | $ | 2,200 | |
| How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.) |
| Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ . |
| The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.): |
| Long-term debt | $ |
| Shareholders' equity | |
| Total | $ |