Corp Fin Week 3 17. Assuming that Gannon’s net working capital varies directly w
ID: 2617547 • Letter: C
Question
Corp Fin Week 3
17. Assuming that Gannon’s net working capital varies directly with sales, based on a 15% sales increase in 2018, what is the projected (or pro forma) accounts receivable balance at the end of 2018?
18. If Gannon projects that by the end of 2017, it was operating at 80% of capacity, what is its full level capacity of sales?
19. Stop and Shop Supermarkets has a 4.5% profit margin and a 25% dividend payout ratio. The total asset turnover is 1.5 and its debt-equity ratio is 0.6. What is its sustainable rate of growth?
20. Trader Joe’s has a 9% percent return on assets and a 75% percent retention ratio. What is its internal growth rate?
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For questions #7-18, refer to the following financial information for Gannon Insurance. YOU MUST SHOW ALL CALCULATIONS TO EARN CREDIT 2016 2017 BALANCE SHEETS: Assets: Cash Accounts Receivable Inventory Fixed Assets, net Total Assets 120,000 520,000 305,000 410,000 1,355,000 160,000 620,000 290,000 510,000 1,580,000 Liabilities and Equity: Accounts Payable Long-term Debt Common Stock Retained Earnin Total Liabilities and Equity 350,000 500,000 50,000 455,000 1,355,000 375,000 625,000 75,000 505,000 1,580,000 INCOME STATEMENT: 3,500,000 2,275,000 515,000 120,000 590,000 40,000 550,000 167,000 383,000 Revenue Cost of Goods Sold General and Administrative ation se Earnings Before Interest and Taxes Interest Pretax Net Income Income Taxes Net Income seExplanation / Answer
Answer 17.
Increase in Sales = 15%
Increase in Accounts Receivable = Increase in Sales * Accounts Receivable 2017
Increase in Accounts Receivable = 15% * $620,000
Increase in Accounts Receivable = $93,000
Accounts Receivable 2018 = Accounts Receivable 2017 + Increase in Accounts Receivable
Accounts Receivable 2018 = $620,000 + $93,000
Accounts Receivable 2018 = $713,000
Answer 18.
Sales at Operating Capacity of 80% = $3,500,000
Sales at Operating Capacity of 100% = $3,500,000 / 80% * 100%
Sales at Operating Capacity of 100% = $4,375,000
Answer 19.
ROE = Profit Margin * Total Asset Turnover * (1 + Debt-equity Ratio)
ROE = 4.5% * 1.5 * (1 + 0.60)
ROE = 10.80%
Retention Ratio, b = 100% - Dividend payout Ratio
Retention Ratio, b = 100% - 25%
Retention Ratio, b = 75% or 0.75
Sustainable Growth Rate = [ROE * b] / [1 - ROE * b]
Sustainable Growth Rate = [10.80% * 0.75] / [1 - 10.80% * 0.75]
Sustainable Growth Rate = 0.0881
Sustainable Growth Rate = 8.81%
Answer 20.
Internal Growth Rate = ROA * b / 1 - (ROA * b)
Return on Assets (ROA) = 9%
Retention Ratio (b) = 75%
Internal Growth Rate = [ROA * b] / [1 - ROA * b]
Internal Growth Rate = [0.09 * 0.75] / [1 - 0.09 * 0.75]
Internal Growth Rate = 0.0724
Internal Growth Rate = 7.24%