**Problem Set 3
1.Use the data for R&E Supplies, Inc on page 92 of your textbook to develop a proforma balance sheet for year 2009.
TABLE 3.1 Financial Statements for R&E Supplies, Inc., December 31, 2005–2008 ($ thousands) << Table is attached on the submitted attachment>>
Use the following assumptions and instructions:
1.Sales are expected to increase by $4,000 in 2009.
2.Prepaid expenses are not spontaneous and will remain at the 2008 level.
3.The bank loan that is shown as a current liability will remain at $50 (e.g. the company has already arranged to roll-over this loan).
4.The current portion of long-term debt will drop to $0.
5.The company plans to acquire $75 of fixed assets in 2009 and depreciation expense is expected to be $15.
6.The company had a payout ratio of 50% in 2008 and this will remain constant in 2009.
7.The company’s 2009 profit margin will be the same as in 2008.
8.Use the percent of sales method to determine the proforma cash , accounts receivable, and accounts payable balances.Use trend lines to estimate the other spontaneous accounts.
9.Assume that the EFN will be financed with ½ short-term debt and ½ long-term debt.
II.After preparing the proforma balance sheet for 2009, compute the following ratios for 2007, 2008 and proforma 2009 and place them in a table as shown below:
Ratio
2007
2008
Proforma - 2009
Current Ratio
Debt to Asset
ROE
III.Using these ratios, discuss the ratio patterns that you observe and conclude whether or not the company’s planned growth improves its financial condition.
IV.Using the data for R&E Supply for year 2006, compute the company’s sustainable growth.You may assume that the expected change to net fixed assets is $25 and that the company wants to keep its existing debt to asset ratio.You may also assume that the payout ratio will be 50%.Then re-compute the sustainable growth assuming that the profit margin will be double that of year 2006 and that the payout will fall to 25%.
Instructions for the rest of the assignment:Solve the following problems.You should clearly indicate your answer and you must show your work (e.g. calculator steps or computations) to receive credit.
2.Find the future value of $5,000 compounded annually at 6% for 15 years.
3.Find the future value of $5,000 compounded monthly at 6% for 15 years.
4.What annual interest rate would provide you with the same amount as the monthly compounding in 15 years?
5.Suppose that you have the following time line and cash flows:
01234567
$0$0$0$0$2,000$2,000$2,000$2,000
Using a 10% discount rate find the present value as of today for this $2,000 annuity using two separate methods.Each method must use the PMT button on your financial calculator.
6.Your oldest son will start college in 10 years.You estimate that you will need $20,000 per year for each of the four years that he is in college to pay his tuition and provide support.If you can invest at 4%, how much must you invest each of the next 10 years to have his college paid for at the time he starts college?
7.Your company is considering opening a new store.The cost of the land is $50,000 and a suitable building will cost $150,000.To put the necessary equipment in the building will cost an additional $25,000.You will need working capital (cash and inventory) of $35,000 in the store.
You believe that the store will produce revenues of $250,000 each year for its 10 year life.Expense of operating the store will be $175,000 each year.
Your company plans to use straight line depreciation on the building and the equipment over the 10 year life of the store.After 10 years, the building would be worth (salvage value) $15,000.(Remember to deduct the salvage value from the depreciable amount when using straight line depreciation.)The land’s value will remain at $50,000.
The company’s tax rate is 30%.
a.Compute the initial outlay of this investment.
b.Compute the yearly cash flows for this investment—since we are using straight line depreciation, the NCF will be the same each year so it is okay to show the computation once.
c.Compute the terminal year cash flows.
Budget
75.00
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**

Subject | Business |

Due By (Pacific Time) | 04/06/2013 10:00 pm |

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