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questions and reword the answers to essay type parts so as to guarantee that your
answer is an original. Do not submit as your own.
4-9A.
(Financial forecastingdiscretionary financing needed) The most recent balance
sheet for the Armadillo Dog Biscuit Co. is shown in the following table. The
company is about to embark on an advertising campaign, which is expected to raise
sales from the current level of $5 million to $7 million by the end of next year. The
firm is currently operating at full capacity and will have to increase its investment in
both current and fixed assets to support the projected level of new sales. In fact, the
firm estimates that both categories of assets will rise in direct proportion to the
projected increase in sales.
Armadillo Dog Biscuit Co., Inc. ($ millions)
PRESENT LEVEL PERCENT OF SALES PROJECTED LEVEL
Current assets $2.0
Net fixed assets 3.0
Total $5.0
Accounts payable $0.5
Accrued expenses 0.5
Notes payable
Current liabilities $1.0
Long-term debt $2.0
Common stock 0.5
Retained earnings 1.5
Common equity $2.0
Total $5.0
The firms net profits were 6 percent of current years sales but are expected to rise
to 7 percent of next years sales. To help support its anticipated growth in asset
needs next year, the firm has suspended plans to pay cash dividends to its
stockholders. In past years, a $1.50 per share dividend has been paid annually.
Armadillos payables and accrued expenses are expected to vary directly with sales.
In addition, notes payable will be used to supply the funds that are needed to finance
next years operations and that are not forthcoming from other sources.
1. Fill in the table and project the firms needs for discretionary financing. Use notes
payable as the balancing entry for future discretionary financing needed.
2. Compare Armadillos current ratio and debt ratio (total liabilities/total assets)
before the growth in sales and after. What was the effect of the expanded sales on
these two dimensions of Armadillos financial condition?
3. What difference, if any, would have resulted if Armadillos sales had risen to $6
million in one year and $7 million only after two years? Discuss only; no calculations
are required.

(a)

Estimating Future Financing Needs

Armadillo Dog Biscuit Co., Inc.
Projected Need for Discretionary Financing

Current Assets
Net Fixed Assets
Total

Present
Level
$2.0m
$3.0m
$5.0m

% of Sales
($5m)
= .40 or 40%
= .60 or 60%

Accounts Payable

$.5m

= .10 or 10%

Accrued Expenses
Notes Payable1
Current Liabilities
Long-Term Debt
Common Stock
Retained Earnings 2
Common Equity
Total

$.5m
-----$1.0m
$2.0m
.5m
1.5m
$2.0m
$5.0m

= .10 or 10%
-----

.10 x 7m = .7m

.10 x 7m = .7m
Plug Figure = 1.11m
$ 2.51m
No Change
$2.00m
No Change
.50m
$1.5m + .07 x $7m =
$ 1.99m
$2.49m
$ 7.00m

Notes payable is a balancing figure which equals discretionary financing needed, DFN, which equals: Total
Assets - Accounts Payable - Accrued Expenses - Long-Term Debt - Common Stock - Retained Earnings =
$7.0m - $0.7m - $0.7m - $2.0m - $0.5m - $1.99m = $1.11m.
The projected retained earnings is the sum of the beginning balance of $1.5m plus net income for the period
(.07 x $7m).

(b)
Current Ratio
Debt Ratio

(c)

Projected Level
(Based on $7m Sales)
.40 x $7m = $ 2.8m
.60 x $7m = $ 4.2m
$ 7.0m

Before
= 2 times
= .60 or 60%

After
= 1.12 times
= .644 or 64.4%

The growth in the firm's assets (due to the projected increase in sales) was
financed predominantly with notes payable (a current liability). This led
to a substantial deterioration in both the firm's liquidity (as reflected in the
current ratio) and an increase in its use of financial leverage.
The slower rate of growth in sales would have allowed Armadillo to finance a
larger portion of the funds needed using retained earnings. For example,
using the 7 percent net profit margin Armadillo would have .07 x $6m =
$420,000 it could reinvest after one-year's operations plus .07 x $7 million =
$490,000 from the second year's sales. The total amount of retained earnings
over the two years then would be $910,000 rather than only $490,000 as
before. This would mean that notes payable would be $380,000 after one
year, and only $1.11m - .42m = $690,000 at the end of the second year. The
resulting level of current liabilities would be $2.09m. Thus, the post sales

growth current ratio after two years would be 1.34 ($2.8m/2.09m = 1.34)
compared to 1.12 with a one-year growth period. The debt ratio under the
two-year growth period will be only 58% compared to approximately 64%
with the single year growth period. The slower growth pace would allow the
firm to expand its assets more gradually, thus requiring less external financing
since more earnings can be retained.
5-3A.
(Compound value solving for i) At what annual rate would the following
have to be invested?
1. $500 to grow to $1,948.00 in 12 years
2. $300 to grow to $422.10 in 7 years
3. $50 to grow to $280.20 in 20 years
4. $200 to grow to $497.60 in 5 years
(a)

FVn

(b)

(c)

(d)

PV (1 + i)n

$1,948
3.896

=
=

$500 (1 + i)12
FVIF i%, 12 yr.

Thus, i

12% (because the Appendix B value of 3.896

occurs in the 12 year row in the 12 percent
column)

FVn

PV (1 + i)n

$422.10

$300 (1 + i)7

1.407

FVIFi%, 7 yr.

Thus, i

5%

FVn

PV (1 + i)n

$280.20

$50 (1 + i)20

5.604

FVIF i%, 20 yr.

Thus, i

9%

FVn

PV (1 + i)n

$497.60

$200 (1 + i)5

FVIFi%, 5 yr.

20%

Thus, i

5-4A.
(Present value) What is the present value of the following future amounts?
1. $800 to be received 10 years from now discounted back to the present at 10
percent
2. $300 to be received 5 years from now discounted back to the present at 5
percent
3. $1,000 to be received 8 years from now discounted back to the present at 3
percent
4. $1,000 to be received 8 years from now discounted back to the present at
20 percent
(a)

(b)

(c)

(d)

PV

PV

FVn

PV

$800

PV

$800 (0.386)

PV

$308.80

PV

FVn

PV

$300

PV

$300 (0.784)

PV

$235.20

PV

FVn

PV

$1,000

PV
PV

=
$1,000 (0.789)
$789

FVn

PV

$1,000

PV

$1,000 (0.233)

PV

$233

5-5A.
(Compound annuity) What is the accumulated sum of each of the following
streams of payments?
1. $500 a year for 10 years compounded annually at 5 percent
2. $100 a year for 5 years compounded annually at 10 percent
3. $35 a year for 7 years compounded annually at 7 percent
4. $25 a year for 3 years compounded annually at 2 percent

(a)

(b)

(c)

(d)

FVn

FV10

n 1

t0

PMT

(1 i) t

10 1

t 0

$500

(1 0.05) t

FV10

$500 (12.578)

FV10

$6,289

FVn

PMT

FV5

n 1

t 0

5 1

t 0

(1 i) t

$100

(1 0.1) t

FV5

$100 (6.105)

FV5

610.50

PMT

FVn

n 1

t0

7 1

t 0

FV7

$35

FV7

$35 (8.654)

FV7

$302.89

FVn

PMT

FV3

FV3
FV3

n 1

t0

3 1

t0

$25

(1 i) t

(1 0.07) t

(1 i) t

(1 0.02)t

=
$25 (3.060)
$76.50

5-6A.
(Present value of an annuity) What is the present value of the following
annuities?
1. $2,500 a year for 10 years discounted back to the present at 7 percent
2. $70 a year for 3 years discounted back to the present at 3 percent
3. $280 a year for 7 years discounted back to the present at 6 percent
4. $500 a year for 10 years discounted back to the present at 10 percent

(a)

PV

PV

(b)

10

t 1

PV

$17,560

PV

PMT

t 1

PV

$70 (2.829)

PV

$198.03

PV

PMT

1
(1 0.03) t

t 1

t 1

PV

$280 (5.582)

PV

$1,562.96

PV

PMT

PV

t 1
10

$500

t 1

PV

$500 (6.145)

PV

$3,072.50

(1 i)
t

$280

(1 i)
t

t 1

$70

(1 0.07)
t

$2,500 (7.024)

$2,500

(1 i)
t

t 1

PV

(d)

PMT

PV

PV

(c)

(1 0.06)
t

(1 i) t
1

(1 0.1) t

5-9A.
(Compound interest with nonannual periods)
1. Calculate the future sum of $5,000, given that it will be held in the bank five
years at an annual interest rate of 6 percent.
2. Recalculate part (a) using a compounding period that is (1) semiannual and
(2) bimonthly.
3. Recalculate parts (a) and (b) for a 12 percent annual interest rate.
4. Recalculate part (a) using a time horizon of 12 years (annual interest rate is

still 6 percent).
5. With respect to the effect of changes in the stated interest rate and holding
periods on future sums in parts (c) and (d), what conclusions do you draw when
you compare these figures with the answers found in parts (a) and (b)?
(a)

FVn

(b)

(c)

=
FV5

$5,000 (1 + 0.06)5

FV5

$5,000 (1.338)

FV5

$6,690

FVn

PV (1 + )mn

FV5

$5,000 (1 + )

FV5

$5,000 (1 + 0.03)10

FV5

$5,000 (1.344)

FV5

$6,720

FVn

PV (1 + )mn

FV5

5,000 (1 + )

FV5

$5,000 (1 + 0.01)

FV5

$5,000 (1.348)

FV5

$6,740

FVn

PV (1 + i)n

FV5

$5,000 (1 + 0.12)

FV5
FV5

FV5

PV (1 + i)n

2X5

6X5
30

=
$5,000 (1.762)
$8,810
mn

PV

FV5

$5,000

FV5

$5,000 (1 + 0.06)10

FV5

$5,000 (1.791)

FV5

$8,955

FV5

PV mn

2X5

(d)

(e)

FV5

$5,000 6X5

FV5

$5,000 (1 + 0.02)30

FV5

$5,000 (1.811)

FV5

$9,055

FVn

PV (1 + i)n

FV12

$5,000 (1 + 0.06)

FV12

5,000 (2.012)

FV12

$10,060

12

An increase in the stated interest rate will increase the future value of a
given sum. Likewise, an increase in the length of the holding period will
increase the future value of a given sum.

5-14A.
(Solving for PMT in an annuity) To pay for your childs education, you wish to
have accumulated $15,000 at the end of 15 years. To do this, you plan to deposit
an equal amount into the bank at the end of each year. If the bank is willing to
pay 6 percent compounded annually, how much must you deposit each year to
obtain your goal?
FVn

n 1

t0

PMT

$15,000

(1 i) t

15 1

t0

PMT

$15,000

PMT (23.276)

Thus, PMT

$644.44

(1 0.06) t