FIN 4410

Second            SHOW ALL WORK

Fall, 2024

(15) 1.   The Pioneer Company is generating its proforma balance sheet for 20x2.  For the

year 20x1 sales were $5 million.  Sales are expected to be $5.5 million in 20x2.  The company expects its net profit margin for 20x2 to equal 7%.  In each of the past several years, the company has been paying $90,000 in dividends to its stockholders.  The company wants to increase dividends to $100,000 in 20x2.  The 20x1 Balance Sheet for Pioneer is below.

The Pioneer Company

Balance Sheet as of December 31, 20x1

Cash $  100,000 Accounts payable $  500,000

Accounts receivable     400,000 Notes payable                 150,000

Inventories  1,200,000 Long-term debt     300,000

Fixed assets, net 500,000 Stockholders' equity 1,250,000

Total assets $2,200,000 Total liabilities & equity $2,200,000

Assume that Cash, Accounts Receivable, Inventories, and Accounts Payable vary directly with sales.  Net Fixed Assets must increase by $200,000 to support the sales expansion.  Notes payable are planned to decrease by $50,000.  A $100,000 long-term debt payment is required in 20x2.  There are no plans to issue any new shares of common stock, nor are there any plans to buy back any of their shares. Any additional financing that Pioneer will need for 20x2 will come from new long-term debt, but Pioneer has a covenant that states that their ratio of total debt to total assets may not exceed 45%.  How much additional financing will Pioneer need?  Can they pay the increased dividend, increase their long-term debt, and still satisfy the covenant?  Show numbers to support your answer.  If Pioneer cannot meet the covenant, how much new equity must be used, instead of some of the new debt, to satisfy the covenant?

(6) 2. Redo #1, but with an expected profit margin of 3%.  All other assumptions remain the same.

(16)    3. You are considering the acquisition of Firm C.  Proforma financial information for Firm C is below; the appropriate discount rate for Firm C is 15%.  After year 15, you will assume that the cash flow from year 15 will then grow at 2% per year forever.  The tax rate is 30%.

Firm C Years 1-5 Year 6 Years 7-13 Year 14 Year 15

Sales 2,000 2,500 2,500 2,500 3.500

Depreciation     40        40        60        60     80

EBIT is assumed to be 60% of Sales.

Interest     20     20     30     30    35

Capital

Expenditures              0     800           0 1,000     0

Increases in

Working Capital   is 10% of the change in sales; invested the period before the sales increase.

Principal Payment       0       0       0   500     0

Using a DCF approach, what is the value for Firm C?  You will assume C’s debt if you    acquire C.

(10)    4. Use the cash budget from the class handout to answer this question

You currently collect your credit sales in the following pattern:  30% one month after the sale, 50% two months after the sale, and 20% three months after the sale.  You have determined that if you offer a 3% cash discount, you can get 50% of each month’s sales to be cash sales.  The remainder of the month’s sales would still be collected in the same existing collection pattern.  This cash discount program will begin January 1. Compare the interest expense savings over the 6-month period to the cost of the new policy.  Should you offer the discount?  All other conditions and assumptions remain the same.  To account for the timing impacts, you have to redo the cash budget

5.   Use Kroger’s information to answer these.

(7)         a. Based on the 2023 numbers, what is the value for their sustainable growth rate for 2024?

(10)              b . Assume that Kroger will have the same values for t, L, and d in 2024 that it did in

2023.  For Kroger to grow in 2024 at the same sales growth rate as they did from

2022 to 2023, what will the value of p have to be?  How does this value for p compare to

the p in part a?  Why did it change as it did (words, not as a math answer)?  Will p change

in this way?  Explain.  What else could Kroger do to either t, L, or d instead of changing p?

6. Use Kroger’s information for 2022 and 2023.

(10) a. Calculate the values for the boxes below; calculate the basic EPS.

(8) b. Use your numbers for each of the 4 ratios, and their percentage changes, to explain

why the EPS changed as it did.  Do you like the reasons for the change?

Did the EPS change due to reasons the stock market would like?

FIN 4410 2 Addendum

In #4. We assumed in the month of January that the firm did not invest the Surplus cash. Continue to assume this if there are any months with Surplus cash.

In #5 and #6, for Kroger’s EAT, use “Net earnings including noncontrolling interests”.  For Stockholders Equity, use “Total Equity”.