UNIVERSITRY OF CENTRAL PUNJAB

CORPORATE FINANCE
MBA EVENING Sec B
ASSIGNMENT 2
Ch 4 Work with example slide 4.26

Submitted to Dr. Rubeena Tashfeen.

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.

MOOSE TOURS, INC

INCOME STATEMENT
2006 $ 2007
SALES $845,000 $1,014,000
COSTS 78% $657,000 $788,400
OTHER EXPENSES 2% $17,500 $21,000
EBT $170,500 $204,600
INTEREST PAID $12,500 $12,500
EBIT $158,000 $192,100
TAXES 35% $55,300 $67,235
NET INCOME $102,700 $124,865

DIVIDENDS $30,810 37,460

RETAINED EARNING $71,890 $87,406
 The payout ratio is constant so the dividend paid in 2007 will be the payout ratio from last year
Dividend for 2007 = (30810/102700) (124865)
Dividends =37,460
Addition to retained earing will be net income –dividend
Addition to R.E= 124,865-37460
=87406
New addition to R.E= 193,000+87406
=280,406.
Now we will make balance sheet as per given scenario:

MOOSE TOURS, INC BALANCE SHEET

ASSET LIABILITIES & OWNER EQUITY
2006 2007 FINAL 2006 2007 FINAL
Current asset Current Liability
Cash $23,000 $27,600 $27,600 Accounts Payable $62,000 $74,400 $74,400
Account Receivable $37,000 $44,400 $44,400 Notes Payable $15,000 $15,000 $15,000
Inventory $79,000 $94,800 $94,800 TOTAL $77,000 $89,400 $89,400
TOTAL $139,000 $166,800 $166,800 Long Term debt $144,000 $144,000 $146,994
owner equity
Fixed Asset common stock $100,000 $100,000 $100,000
Net plant and equipment 20% $375,000 $450,000 $450,000 Retained earning $193,000 $280,406 $280,406
TOTAL $293,000 $380,406 $380,406
TOTAL ASSET $514,000 $616,800 $616,800 TOTAL LIABILITY $514,000 $613,806 $616,800

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?

If the firm operating at 80% capacity

Sale of 2006 was 845,000/- USD

= 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.

MOOSE TOURS, INC BALANCE SHEET

ASSET LIABILITIES & OWNER EQUITY
2006 2007 FINAL 2006 2007 FINAL
Current asset Current Liability
Cash $23,000 $27,600 $27,600 Accounts Payable $62,000 $74,400 $74,400
Account Receivable $37,000 $44,400 $44,400 Notes Payable $15,000 $15,000 $15,000
Inventory $79,000 $94,800 $94,800 TOTAL $77,000 $89,400 $89,400
TOTAL $139,000 $166,800 $166,800 Long Term debt $144,000 $144,000 $71,994
owner equity
Fixed Asset common stock $100,000 $100,000 $100,000
Net plant and equipment $375,000 $375,000 $375,000 Retained earning $193,000 $280,406 $280,406
TOTAL $293,000 $380,406 $380,406
TOTAL ASSET $514,000 $541,800 $541,800 TOTAL LIABILITY $514,000 $613,806 $541,800

So now EFN is 541,800-613,806

= -72,006/-
That means MOOSE TOURS does not need external financing they will pay off their
debt, kindly review above final Colum for balancing figures

B. In the previous problem, suppose the firm was operating at only 95 percent capacity
in 2006. What is EFN now?

If the firm operating at 95% capacity,

Sale of 2006 was 845,000/- USD

=845,000/0.95

=889,473.6/- full capacity

 So 2007 sale 1,014,000 > 889,473.6

We will calculate CAPACITY INTENCITY RATIO (CIR)

CIR= net fixed asset/ full capacity

= 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

MOOSE TOURS, INC BALANCE SHEET

ASSET LIABILITIES & OWNER EQUITY
2006 2007 FINAL 2006 2007 FINAL
Current asset Current Liability
Cash $23,000 $27,600 $27,600 Accounts Payable $62,000 $74,400 $74,400
Account Receivable $37,000 $44,400 $44,400 Notes Payable $15,000 $15,000 $15,000
Inventory $79,000 $94,800 $94,800 TOTAL $77,000 $89,400 $89,400
TOTAL $139,000 $166,800 $166,800 Long Term debt $144,000 $144,000 $124,494
owner equity
Fixed Asset common stock $100,000 $100,000 $100,000
Net plant and equipment $375,000 $427,500 $427,500 Retained earning $193,000 $280,406 $280,406
TOTAL $293,000 $380,406 $380,406
TOTAL ASSET $514,000 $594,300 $594,300 TOTAL LIABILITY $514,000 $613,806 $594,300

Now EFN is 594,300 -613,806= -19,506/- EFN

Paid off debt of -19506
 C. If Company wants to maintain a constant debt-equity ratio constant then what is the
EFN now?

Debt equity ratio = current liability + LTD/owners’ equity

= (77000+144000)/293000

= 221000/293000

=0.75427

New total debt 0.75427*380406

= 286,927

Total liabilities will be 380406+286927= 667,333

EFN = Total asset- total liabilities

= 616800-666,698
= -50,533/- EFN
Means that they will pay off debt

MOOSE TOURS, INC BALANCE SHEET

ASSET LIABILITIES & OWNER EQUITY
2006 2007 FINAL 2006 2007 FINAL
Current asset Current Liability
Cash $23,000 $27,600 $27,600 Accounts Payable $62,000 $74,400 $74,400
Account Receivable $37,000 $44,400 $44,400 Notes Payable $15,000 $15,000 $15,000
Inventory $79,000 $94,800 $94,800 TOTAL $77,000 $89,400 $89,400
TOTAL $139,000 $166,800 $166,800 Long Term debt $144,000 $197,527 $146,994
owner equity
Fixed Asset common stock $100,000 $100,000 $100,000
Net plant and equipment $375,000 $450,000 $450,000 Retained earning $193,000 $280,406 $280,406
TOTAL $293,000 $380,406 $380,406
TOTAL ASSET $514,000 $616,800 $616,800 TOTAL LIABILITY $514,000 $667,333 $616,800