Financial Planning and Budgeting 1)Frog Hollow Bakery is a new firm specializing in all-natural-ingredient pastry products.

In attempting to determine what the financial position of the firm should be, the financial manager obtained the following average ratios for the baking industry for 2010: Common equity to total assets = 60% Total asset turnover = 3 times Long-term debt to total capitalization = 25% Current ratio = 1.2 Quick ratio = .75 Average collection period (360-day year) = 10 days Complete the accompanying pro forma balance sheet for Frog Hollow Bakery assuming 2011 sales (all credit) are $450,000. Frog Hollow Bakery Pro Forma Balance Sheet December 31, 2011 Cash $ Current debt $ Accounts receivable Long-term debt Inventory Total current assets Common equity Fixed assets Total liabilities and equity $ Total assets 2) Amalgamated Enterprises is planning to purchase some new equipment. With this new equipment, the company expects sales to increase from $8,000,000 to $10,000,000. A portion of the financing for the purchase of the equipment will come from a $1,000,000 new common stock issue. The company knows that current assets, fixed assets, accounts payable, and accrued expenses increase in direct proportion with sales. The company's net profit margin on sales is 8%, and the company plans to pay 40% of its after-tax earnings in dividends. A copy of the company's current balance sheet is given below: Amalgamated Enterprises Balance Sheet Current assets $3,000,000 Fixed assets 12,000,000 Total assets $15,000,000 Accounts payable $4,000,000 Accrued expenses 1,000,000 Long-term debt 3,000,000 Common stock 2,000,000 Retained earnings 5,000,000 Total liabilities and net worth $15,000,000

Prepare a pro forma balance sheet for Amalgamated for next year using the percent-ofsales method and the information provided above. 3) Lindsey Insurance Co. has current sales of $10 million and predicts next year's sales will grow to $14 million. Current assets are $3 million and fixed assets are $4 million. The firm's net profit margin is 7% after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders. a. What are Lindsey's total financing needs for the upcoming year? b. Given the above information, what are Lindsey's discretionary financing needs? Review for Mid-term A. The concepts of Finance 1) what is finance? 2) The goal of the firm 3) Advantages of a public corporation than a partnership or a proprietorship? Access to capital market Ability to raise large sum of money Limited liability 4) Difficulty in finding profitable projects is due to: 5) ) Basic principles of financial management? 6) Primary and Secondary Market 7) Advantages and Disadvantages of: Sole Proprietorship, Partnership, Corporation in terms of: Ownership, management, formation, organizational cost, accessibility in the market, Growth, liability of the owners, investment, legal requirements, business and personal assets 8) Why maximization of shareholders wealth is superior over maximization of profit? 9) The agency problem theory. Aligning the interest of the managers and the shareholders? 10) IPO, secondary market, new seasoned issue 11) In finance, investors normally are averse of risk 12) Considerations when assessing the financial impact of business decisions? A) The amount of projected earnings B) The risk-return tradeoff C) The timing of projected earnings; i.e., when they are expected to occur D) The amount of the investment in a given project

13) Financial management is concerned with which of the following? A) Creating economic wealth B) Making investment decisions that optimize economic value C) Making business decisions that optimize economic wealth D) Raising capital that is needed for growth E) All of the above Answer: E 14) Which of the following is a characteristic of an efficient market? C) Security prices reflect fair value of the firm. B. Understanding Financial Statements, Taxes and Cash Flows 1) Which of the basic financial statements is best used to answer the question, "How profitable is the business?" Earnings of the firms operations over a given time period. 2) Who owns the retained earnings of a public firm? 3) Stock that is repurchased by the issuing company is called: Treasury Stock 4)EBIT , deductible expenses to compute EBIR, dividend expense? 5)Retained Earnings, computation of retained earnings end. 6)Looking for missing items in the balance sheet? 7)Operating Income or EBIT 8)Components of Balance Sheet: Current Assets, Fixed Assets, Current Liabilities, Equity(at specified point in time) 9) Computation of net income 10)Components of Cash Flows (Operating, Investing, Financing) C. Evaluating Firms Financial Performance 1) Why do we analyze financial statements 2) The impact of debt with ROE 3) Discuss why debt is considered a two-edged sword. Answer: Financing with debt can enhance the return to equity investors during good times. Even though interest expense does reduce net profit, by financing with debt, less equity investment is required. Therefore, profits are shared across fewer equity dollars. Even though profits are lower, equity invested is lower which creates an enhanced return. However, during bad times, interest expense must be paid which could significantly reduce already low profits. Therefore, firms with lower debt financing would enjoy higher profits and higher returns to the investor. 4) List the four ways that improvement can be made in return on equity. Answer: 1) Increase in sales without a disproportionate increase in costs and expenses. 2) Reduce the firm's cost of goods sold or operating expenses. 3) Increase the sales relative to the asset base, either by increasing sales or by

reducing the amounts invested in company assets. 4) Increase the use of debt relative to equity, but only to the extent that it does not unduly jeopardize the firm's financial position. 5) Common size financial statements: Report of Balance Sheet and Income Statement in percentages 6) Financial Ratios Liquidity Current Ratio Acid Test Ratio Receivable Turnover/Collection period Inventory Turnover/number of days an inventory is sold or converted into cash Debt Ratio (leverage ratio) Times interest earned Efficiency Ratio (Turnover ratios) Asset Turnover Fixed Asset Turnover Receivable Turnover Inventory Turnover Profitability Return on Assets Return on Equity (different formulas to measure ROE) Net profit margin x Total Asset Turnover/1-debt ratio OIROA 7) Limitations of Ratio Analysis