Corporate Finance 2

Corporate Finance
Page 1 of 5
Question 3-19 (p. 103):

Item
2012
2011
Sales Revenue ($30,000,000)
100%
100%
Less: Cost of gods sold
70.0%
65.9%
30.0%
34.1%
10.0%
12.7%
General and administrative expenses
6.0%
6.3%
Lease expense
0.7%
0.6%
Depreciation expense
3.3%
3.6%
20%
23.2%
10%
10.9%
3.3%
1.5%
6.6%
9.4%
Less: Taxes (rate = 40%)
2.7%
3.8%
Net profits after taxes
4.0%
5.6%
0.3%
0.1%
Gross profits
Less: Operating expenses
Selling expense
Total operating expense

Operating Profits
Less: Interest expense
Net profits before taxes
Less: Preferred stock dividends

Earnings available to common
stockholders
3.7%
5.5%
Question 4-19 (p. 154):

a) Pro forma income statement using percent-of-sales method:
TABLE 2. Red Queen Restaurant Pro Forma Income Statement for the Year ended in December 31, 2013
Item
2013
Assumptions/Calculations
Sales
$900,000 Given in Item (1)
Less: Cost of goods sold
$675,000 75% of sales (2012: ($600,000/$800,000)*100% = 75%)
Gross profits
$225,000 $900,000 - $675,000 = $225,000
Less: Operating expenses
$112,500 12.5% of sales (2012: ($100,000/$800,000)*100% = 12.5%)
Net profits before taxes
$112,500 $225,000 - $112,500 = $112,500
Less: Taxes (rate = 40%)
$45,000 $112,500 X 40% = $45,000
Net profits after taxes
$67,500 $112,500 - $45,000 = $67,500
Less: Cash dividends
To retained earnings
$32,700 $67,500 - $35,000 = $32,700
b) Pro forma balance sheet using judgmental approach:

Assets
Cash
Marketable securities
Accounts receivable
Inventories
Red Queen Restaurants Pro Forma Balance Sheet December 31, 2013
Assumptions/Calculations
$18,000 Given in Item (9) as unchanged from 2012
Given in Item (4) 18% of annual sales ($900,000 X 0.18 =
$162,000
$162,000)
Given in Item (5) 12.5% of sales in 2012
($100,000/$800,000)*100% = 12.5%)
$112,500
Applied to 2013 projected sales ($900,000 X 0.125 =
$112,500)
Page 2 of 5
Total current assets
$322,500
Net fixed assets
$375,000
Total assets
$697,500
$30,000 + $18,000 + $162,000 + $112,500 = $322,500

$350,000 (2012 figure) + $42,000 (new machine) - $17,000
(2013 depreciation) = $375,000
$322,500 + $375,000 = $697,500
Liabilities and Stockholders Equity

Accounts payable
$112,500
Taxes payable
$11,250
Other current liabilities

Total current liabilities
Long-term debt
Total liabilities
Common stock
$5,000
$128,750
$200,000
$328,750
$150,000
Retained earnings
$207,700
Total liabilities and stockholders equity
$686,450
External financing required
$11,050
Given in Item (7) 12.5% of sales in 2012

($100,000/$800,000)*100% = 12.5%)
Applied to 2013 sales in pro forma income statement:
$900,000 X 0.125 = $112,500
Given in Item (8) as 25% of taxes in pro forma income
statement ($45,000 X 0.25 = $11,250)
Given in Item (9) as unchanged from 2012
$112,500 + $11,250 + $5,000 = $128,750
$128,750 + $200,000 = $378,500
$175,000 (2012 figure) + $32,700 (from 2013 pro forma
income statement) = $207,700
$328,750 + $150,000 + $207,700 = $686,450
Total assets Total liabilities and stockholders equity
($697,500 - $686,450= $11,050
Question 5-16 (p. 201):

Formula for Present Value () = () [(1 (1 + ) ]
a) Alternative A: = $28,500 [(1 (1 + 0.11)3 ] = $20,838.95
Alternative B: = $54,000 [(1 (1 + 0.11)9 ] = $21,109.94
Alternative C: = $160,000 [(1 (1 + 0.11)20 ] = $19,845.43
Question 5-19 (p. 202):
a) (1) Ordinary Annuity

Formula for Future Value of Ordinary Annuity =
Case A: = $2,500
Case B: = $500
(1+0.07)3 1]
0.07
(1+0.12)6 1]
Case C: = $10,000
0.12
= $8,037.25
= $4,057.59
(1+0.20)5 1]
0.20
= $74,416.00
[(1+) ]1]
Page 3 of 5
Case D: = $11,500
Case E: = $6,000
(1+0.09)8 1]
0.09
(1+0.14)30 1]
= $2,140,721.08
0.14
a) (2) Annuity Due
= $126,827.45
Formula for Future Value of Annuity Due =

Case A: = $2,500
Case B: = $500
(1+0.07)3 1]
0.07
(1+0.12)6 1]
Case C: = $10,000
(1 + 0.20) = $89,299.20
(1+0.09)8 1]
(1+0.14)30 1]
0.14
(1 + )
(1 + 0.12) = $4,544.51
0.20
0.09
(1 + 0.07) = $8,599.86
(1+0.20)5 1]
Case D: = $11,500
Case E: = $6,000
0.12
[(1+) ]1]
(1 + 0.09) = $138,241.92
(1 + 0.14) = $2,440,422.03
Case 5 (Funding Jill Morans Retirement Annuity):
a) How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year,
$42,000 annuity?
Since the annuity payments will be made at the end of each year, this is an ordinary annuity.
The applicable formula to determine the amount needed at the beginning of the 20-year
distribution period is as follows:
Formula for Present Value of Ordinary Annuity = 1 (1+)
Substitute CF = $42,000, r = 12%, n = 20

=
$42,000
1
1
= $313,716.63
(1 + 0.12)20
0.12
Based on the above, the amount needed at the end of the 12+1-year accumulation period (or
at the beginning of the 20-year distribution period is $313,716.63
b) The future value of the annuity at the beginning of the distribution period is $313,716.63. In
order to calculate the annual contributions to reach that amount at the end of 13 years (12
year accumulation period + 1 year to compensate the fact that the deposits into the account
will be at the end of the year) with 9% annual interest, the following formula can be used:
Page 4 of 5
[(1 + ) ] 1]
=
Substitute FV = $313,716.63, r = 9%, n = 13

= $313,716.63
[(1 + 0.09)13 ] 1]
= $13,667.55
0.09
Sunrise Industries should make an annual contribution of $13,667.55 at the end of each year
for 13 years in order to reach the target amount of $313,716.63 at the end of the period, given
that the interest rate is 9% per annum.
c) Substitute FV = $313,716.63, r = 10%, n = 13
[(1 + 0.10)13 ] 1]
= $313,716.63
= $12,792.90
0.10
for 13 years in order to reach the target amount of $313,716.63 at the end of the period, given
d) In order to calculate the annual contribution during the accumulation period for a perpetuity
annuity, the following formula is used to find the present value of the annuity at the
beginning of the distribution period:
Substitute CF = $42,000, r = 12%
= $42,000 0.12 = $350,000
The future value of the annuity at the beginning of the distribution period is $350,000. In
order to calculate the annual contributions to reach that amount at the end of 13 years with
9% annual interest, the following formula can be used:
=
Substitute FV = $350,000, r = 9%, n = 13
[(1 + ) ] 1]
Page 5 of 5
[(1 + 0.09)13 ] 1]
= $350,000
= $15,248.30
0.09
for 13 years in order to reach the target amount of $350,000 at the end of the period, given

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Corporate Finance

Question 3-19 (p. 103):

Sales Revenue ($30,000,000)

Less: Cost of gods sold

General and administrative expenses

Less: Taxes (rate = 40%)

Net profits after taxes

Total operating expense

Less: Preferred stock dividends

Question 4-19 (p. 154):

b) Pro forma balance sheet using judgmental approach:

Net fixed assets

$30,000 + $18,000 + $162,000 + $112,500 = $322,500

Liabilities and Stockholders Equity

Other current liabilities

Total liabilities and stockholders equity

External financing required

Given in Item (7) 12.5% of sales in 2012

Question 5-16 (p. 201):

Alternative C: = $160,000 [(1 (1 + 0.11)20 ] = $19,845.43

Question 5-19 (p. 202):

a) (1) Ordinary Annuity

a) (2) Annuity Due

Formula for Future Value of Annuity Due =

Case 5 (Funding Jill Morans Retirement Annuity):

Formula for Present Value of Ordinary Annuity = 1 (1+)

Substitute CF = $42,000, r = 12%, n = 20

Substitute FV = $313,716.63, r = 9%, n = 13

Substitute CF = $42,000, r = 12%

= $42,000 0.12 = $350,000

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