A.

Symbolic Logic Corporation is a technological leader in the application of surface mount

technology in the manufacture of printed circuit boards used in the personal computer
industry. The firm recently patented an advanced version of its path-breaking technology and
expects sales to grow from its present level of P5 million to P8 million by the end of the
coming year. Since the firm is at present operating at full capacity, it expects to have to
increase its investment in both current and fixed assets in proportion to the predicted increase
in sales. The firms net profits were 7 percent of current years sales but are expected to rise
to 8 percent of next years sales. To help support its anticipated growth in asset need next
year, the firm has suspended plans to pay cash dividends to its stockholders. In years past a
P1.25 per share dividend has been paid annually.
Symbolic Logic Corp.
Balance Sheet
December 31, 2009
(in millions)

Current Assets P2.5

Net Fixed Assets 3.0
Total P5.5
===
Accounts Payable P1.0
Accrued Expenses 0.5
Long-term debt 2.0
Ordinary shares 0.5
Retained earnings 1.5
Total P5.5
===
SLCs payables and accrued expenses are expected to vary directly with sales. In addition,
notes payable will be used to supply the funds needed to finance next years operations and
that are not forthcoming from other sources.
a. Fill in the table and project the firms needs for discretionary financing. Use notes
payable as the balancing entry for future discretionary financing need.
b. Compare SLCs current ratio and debt ratio before the growth in sales and after. What
was the effect of the expanded sales on these two dimensions of SLCs financial
condition?

B. Ferrari Company has the following statements which are representative of the companys
historical average:

Income Statement

Sales P8,000,000
Cost of sales 4,800,000
Gross Profit P3,200,000
Operating Expenses 1,520,000
Operating Income 1,680,000
Interest Expense 280,000
Earnings before tax 1,400,000
Income tax (35%) 490,000
Net income P 910,000
=======

Balance Sheet

Cash P 200,000
Accounts receivable 1,600,000
Inventory 3,000,000
Property and Equipment 3,200,000
Total Assets P8,000,000
=======

Accounts Payable P1,000,000

Accrued liabilities 120,000
Bonds Payable 600,000
Preference shares 280,000
Ordinary shares 4,800,000
Retained earnings 1,200,000
Total liabilities and equity P8,000,000
=======
The firm is expecting a 20 percent increase in sales next year. Only the current assets are
expected to vary with sales with fixed asset to remain at the same level. Only the current
 liabilities will increase with sales. The long term liabilities are expected to be at the same
level.

The company pays dividends to its preference shares at 10%. Dividend pay out ratio for the
ordinary shares is 60%. Any additional financing requirement will be financed with following
mix, 10% bonds, 5% preference and 85% ordinary shares.

Required:
1. Determine the discretionary financing requirement (or surplus)
2. Prepare the forecasted financial statement (first pass plotting the financial feedback)

C. Wimbledon, Inc. estimates that it invests 40 cents in assets for each dollar of new sales.
However, 5 cents in profits are produced by each dollar of additional sales, of which 1 cent
can be reinvested in the firm. If sales rise from their present level of $5 million by $0.5 million
next year, and the ratio of spontaneous liabilities to sales is 0.15, what will the firms need for
discretionary financing?

D. The financial statements of the Boogie World, Inc. for the current year are as follows:

Additional information:
1. For next year (2010), the company expects sales to increase by 15%. Only current assets and
current liabilities will continue to vary with sales.
2. Depreciation expense is equal to the cost of replacing worn-out assets.
3. The corporation wants to maintain its dividend pay-out ratio of 70%.
4. The market prices for the bonds, preference shares, and ordinary shares will approximate
their face value and par values.
Requirements:
1. How much is the total assets of the firm and determine the discretionary financing
requirement if all the projections hold true.
2. Prepare the forecasted financial statements if the company is planning to source the
discretionary financing requirement from issuing bonds, preference or ordinary shares. Decide
the most appropriate financing source if the company is to maximize its earnings per share.
3. Determine the amount of increase in sales that will not require additional financing
requirement for the company.

E. The Millennium Company has the following statements which are representative of the
companys historical average.
 Income Statement

Sales P2,000,000
Cost of Sales 1,200,000
Gross profit 800,000
Operating expenses
380,000
Earnings before interest and taxes 420,000
Interest expense 70,000
Earnings before taxes 350,000
Taxes (35%) 122,000
Earnings after taxes P 227,500

Dividends P 136,000

Balance Sheet

Assets

Cash P 50,000
Accounts receivable 400,000
Inventory 750,000
Current assets P1, 200,000
Fixed assets (net) 800,000
Total assets P2, 000,000

Liabilities and Equity

Accounts payable P 250,000

Accrued wages 10,000
Accrued taxes 20,000
Current liabilities P 280,000

Notes payable bank 70,000

Long-term debt 150,000
Ordinary shares 1,
200,000 Retained earnings
300,000 Total liabilities and equity
P 2,000,000

The firm is expecting a 25% percent increase in sales next year, and management is concerned
about the companys need for external funds. The increase in sales is expected to be carried out
without any expansion of fixed assets, but rather through more efficient asset utilization in the
existing store. Among liabilities, only current liabilities vary directly with sales. Dividend pay-out ratio
will be the same.

Required: Using the percent-of-sales method, determine whether the company has external
financing needs or a surplus of funds.

F. (Financial Forecasting) Sambonoza Enterprises projects its sales next year to be

$4million and
expects to earn 5 percent of that amount after taxes. The firm is currently in the process
of projecting its financing needs and has made the following assumptions (projections):
1. Current assets will equal 20 percent of sales, while fixed assets will remain at their
current level of $1 million.
2. Common equity is currently $0.8 million, and the firm pays out half its after-tax
earnings in dividends.
3. The firm has short-term payables and trade credit that normally equal 10 percent of
sales, and has no long-term dept outstanding.

Required: What are Sambonozas financing needs for the coming year?

G. (Financing Forecasting-Percent of Sales) Tulley Appliances, Inc., projects next years

sales to be $20 million. Current sales are at $15 million based on current assets of $5
 million and fixed assets of $5 million. The firms net profit margin is 5 percent after
taxes. Tulley forecasting casts that current assets will raise in direct proportion to the
increase in sales, but fixed assets will increase by only $100,000. Currently, Tulley
has $1.5 million in accounts payable (which vary directly with sales), $2 million in
long-term debt (due in ten years) and common equity (including $4 million in
retained earnings) totaling $6.5 million. Tulley plans to pay $500,000 in common
stock dividends next year.

a. What are Tulleys total financing needs (that is, total assets) for the coming year?

b. Given the firms projections and dividend payment plans, what are its
discretionary financing needs?

Based on your projections, and assuming that the $100,000 expansion in fixed assets
will occur,
what is the largest increase in sales the firm can support without having to resort to
the use of
discretionary sources of financing?