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CORPORATE FINANCE
MBA EVENING Sec B
ASSIGNMENT 2
Ch 4 Work with example slide 4.26
Submitted by:
Haroon Zafar L1F16MBAM0260
Mir M. Omer L1F18MBAM0208
Qasim Ali L1F18MBAM0033
The most recent financial statements for Moose Tours, Inc., follow.
• Sales for 2007 are projected to grow by 20 percent. Interest expense will remain constant;
the tax rate and the dividend payout rate will also remain constant.
• Costs, other expenses, current assets, and accounts payable increase spontaneously with
sales. If the firm is operating at full capacity and no new debt or equity is issued:
What external financing is needed to support the 20 percent growth rate in sales?
A. In the previous problem, suppose the firm was operating at only 80 percent
capacity in 2006. What is EFN now?
B. In the previous problem, suppose the firm was operating at only 95 percent
capacity in 2006. What is EFN now?
C. If Company wants to maintain a constant debt-equity ratio constant then what is
the EFN now?
Ans:
With the given scenario sales of 2007 projected to grow at 20% following is the income
statement with the percentage of sale approach.
Now if we look at our 2007 balance sheet right side is more as compare to left side the difference
between both sides are as follows:
616,800-613806 = 2,994/-
Our EFN will be 2294/- that means MOOSE TOURS does need external financing, they will
long term debt. Kindly review above balance sheet third Colum with the name FINAL for
balancing figures.
We can also say that our plug variable is debt.
A. In the previous problem, suppose the firm was operating at only 80 percent capacity
in 2006. What is EFN now?
= 845,000/0.80
= 1,056,250/- USD
Our new sale for 2007 projected was 1,014,000
So 1,014,000 < 1,056,250 Hence capacity available no more asset required.
B. In the previous problem, suppose the firm was operating at only 95 percent capacity
in 2006. What is EFN now?
=845,000/0.95
= 375,000/889,473.6
= 0.42159
At sale of 1014,000 we need 1,014,000*0.42159= 427,500
Asset needed – current available asset
=427,500-375,000
= 52,500 USD
That means we need 52,500 worth of more asset to produce 1014000 sales.
Income statement will remain same balance sheet will change
= (77000+144000)/293000
= 221000/293000
=0.75427