MBA 6103c CORPORATE FINANCE
Explanation OF THEMIDTERM TEST
You should be prepared to answer the variety of the questions relying on course materials, lectures, personal experiences, additional information about the content etc. to arrive at your own views on the subject. Be sure to justify your views where required.
1) Grading Criteria
The outcomes of this mid-term test will be assessed using exclusively the following criteria and weights
Remember: A well prepared and presented report pays-off
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2) Notification
Please note thatthe use of other students work,submitting this tests answers written wholly or partly by other(s), rendering on electronically available sources and collaborating without the professors permission, constitutes a serious violation of the standards for this test and will not be considered for grading.
Students are expected to promote and protect academic integrity.
The Gadgett Blank Company case (GBC)
(Topic: Percentage of sales method)
Mr. De Laurentis VP Finance & Administration ofthe Gadgett Blank Company (GBC)was reviewing key
positions of the Companys current financial statements prepared and supplied by the companys
Accounting and reportingdepartment. (See tables 1&2in Appendix A below)
The company, in its budget meeting for next year, decided to set a goal for increase in sales by 10%. Also
the decision was made to maintain its profit margin for the coming year at same levels as in current
year. Note also that GBCs policy dictates to maintain a constant dividend payout ratio and a constant
Debt-equity ratio.
In light of the above, Mr. De Laurentis wants aquickestimate for the coming year of GBCs possible external financings needed, its growth potentials relying on internal resources,its production capacity constraints, as well as to assess the substance of the companys needs for improving overall performance,not excluding the areas of invested capital rationalization.
Q1) Percentage of sales method-Potential growth (65 points)
Based on the information provided above and the financial statements in appendix A, Mr. De Laurentis
wants you;
a. To determine if there will be need for external financing (EFN), in support to forecasted growth in sales as well as to quantify how much this financing would be?(Hind: Use either the percent of sales method –projected fin. statements – or the EFN formula approach )
(Assume GBC operates in full capacity) (45 points)
b. In light of the fact that GBC Company maintains a constant dividend payout ratio and a constant debt-equity ratio; what is the maximum growth rate the Company can achieve? (Sustainable growth)(10 points)
c. In light of the fact that GPS Company has a constant dividend payout ratio and profit margin;what is the maximum rate at which the Company can grow if they do not want any external financing of any kind? (Internal growth)(10 points)
Q2) Management Decisions Affecting EFN (35 points)
Rendering on the findings in Q1 with regards toexternal financing needs for the Gadgett Blank Company, how would the following facts or policy changes affect the value of GBCs external financing needs? Indicate whether the EFN increases or decreases from the initial value you determined. Be sure you explain why.
a.The board of directors ofGBCdecides to increase the dividend payout.
b. The production managers introduce a new control system that will significantly reduce the level of inventory for any given level of sales.
c. GBCssuppliers have reduced the amount of credit available toGBC.
d. GBChas sufficient excess capacity to produce all of next year’s projected sales increase without increasing its fixed assets.
e. The bank proposes toGBCa new cash management system that will enable the company to lower its cash balances significantly at any level of sales without taking additional liquidity risks.
f. GBCssales manager proposes a reduction in sales price to meet competition. Reducing the sales price is not expected to change the overall sales volume (units sold).
g. The credit manager proposes reducing the amount of timeGBCs customers are given credit. The change is not expected to affect the firm’s sales.
(35 points in total)-5 points for each answer
APPENDIX A
KEY FINANCIAL DATA FOR
The Gadgett Blank Company case (GBC)
The Gadgett Blank Company (GBC)
BALANCE SHEET
CURRENT YEAR (000 USD)
Cash&equivalents
490
Accounts receivable (A/R)
975
Inventory
2,780
Total Current Assets
4,245
Net fixed assets
5,165
Total assets
9,410
Accounts Payable (A/P)
1,670
Long term debt
3,550
Common Stock
2,850
Retained Earnings (R/E)
1,340
Total liab. & equity
9,410
TABLE 1
The Gadgett Blank Company (GBC)
INCOME STATEMENT
CURRENT YEAR (000 USD)
Net Sales
6,940
Cost of goods sold (COGS)
4,860
Sales & Gen. Admin expenses (SG&A)
490
Earnings Before Interest & Taxes (EBIT)
1,590
Interest Expenses
330
Earnings Before Taxes (EBT)
1,260
Taxes (~35%)
440
Net Income after taxes (NIAT)
820
Cash dividends (DPO)
320
Trans. To retained earnings (R/E)
500
TABLE 2
GOOD LUCK