Problem Set #5

Problem Set #5

Marvin industries Inc. operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, teams, and organizations to create, publish, promote, and monetize their digital content. The company is forecasting operations to determine the additional financing that will be needed to support its operations and to assess whether the firm’s anticipated performance is in line with the company’s own general targets and investors’ expectation.

Marvin Industries: balance sheet as of December 31, 2020 (Thousands of dollars)

Cash2,000Accounts Payable7,200
Receivables10,800Notes Payable3,400
Inventories12,400Accruals   2,620
Total current assets25,200Total current liabilities13,220
  Long-term debt?
Fixed assets21,600Common stock2,000
  Retained earnings   26,580
Total assets46,800Total liabilities & equity    46,800

 

Marvin Industries: Income Statement for December 31, 2020 (Thousands of dollars)

Sales36,000
Operating costs30,000
EBIT5,400
Interest720
Taxes @ 25%1,170
Net income3,510
Dividends 60%2,016
Addition to retained earnings1,404

 

Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Marvin has arranged to sell $5,000 of new common stock in 2021 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2021. The company’s net profit margin on sales is 9.75%, and 60% of earnings will be paid out as dividends. Marvin is operating at full capacity, so its assets must grow at the same rate as projected sales.

  1. What were Marvin’s long-term debt and total liabilities for 2020?
  2. Sales are projected to increase by 25% over the 2020 sales figure. Determine the forecasted change in company’s sales over the forecasting period.
  3. Use the AFN equation to forecast Marvin’s additional funds needed for the coming year to support the company’s growth.

(HINT: AFN = (A0*/S0)(∆S) – (L0*/S0)(∆S) – (M)(S1)(1 – payout) – new common stock)

  1. Explain how the following factors affect external capital requirements:
    1. payout ratio
    2. capital intensity
    3. profit margin
  2. Calculate the required level of fixed assets for Marvin Industries if the company operates at no excess capacity with full capacity sales of $36,000 in 2020.
  3. Define the term self-supporting growth rate. Determine the self-supporting growth rate for Marvin Industries.

A small company, Stevens Textile Co. is expanding its operations and needs additional financing to support its expansion projects. The company is planning to change its business registration from a limited liability company to a corporation. As a corporation it will be listed on the stock exchange market and sell shares to the public to raise capital from investors. The business will be managed by professional executives who are not owners of the corporation.

  1. Explain agency relationship and agency costs to the owners of Stevens Textile Co.
  2. Suppose Stevens Textile company is very successful and the founders’ cash out most of their stock and turn the company over to an elected board of directors. Neither the founders nor any other stockholders own a controlling interest (this is the situation in most public companies). List six potential managerial behaviors that can harm a firm’s value.
  3. What is corporate governance? List five corporate governance provisions that are internal to a firm and under its control.
  4. Stevens Textile Co. might want to reduce the conflict of interest that may arise between corporate executives and shareholders by electing board of directors to oversee the activities of the corporate executives. Identify five characteristics of the board of directors that usually lead to effective corporate governance.

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