Profit margin-asset turnover and financial leverage

Assignment Help Accounting Basics

Reference no: EM131812609

Please explain answers and show calculations/equations.

You have the following information for I. M. Small Enterprises for the current year (Y0).

Income Statement (M$)	Y0	Y1
Sales	1400
Cost of Goods Sold	700
SG&A	200
Depreciation	100
Earnings Before Interest & Tax (EBIT)	400
Interest Expense	40
Earnings Before Tax	360
Taxes (40%)	144
Net Income	216
Dividends	100

Balance Sheet (M$)	Y0	Y1
Cash	100
Accounts Receivable	300
Inventories	500
Current Assets	900
Gross PPE	400
Accumulated Depn	300
Net Fixed Assets	100
TOTAL ASSETS	1,000
Accruals	25
Accounts Payable	150
Notes Payable	75
Current Liabilities	250
Long Term Debt	350
Common Stock	100
Retained Earnings	300
Total Liability & Equity	1,000

Calculate the profit margin, asset turnover and financial leverage for Y0. Use DuPont to get the return on equity.If the industry has a net profit margin of 10%, a total asset turnover of 1.50 and financial leverage of 2, what conclusions can you make about Small?

A. Forecast the income statement and balance sheet for Y1.Assume:Sales and accounts receivable grow by 25%; cost of goods sold, inventory and accounts payable grow 20%; and SG&A grows 10%.Interest expense will fall to 25M.The following accounts will not change (same dollar amount): depreciation expense, dividends, cash, accruals, notes payable, long-term debt, common stock.The firm will need 150M more in gross PPE.Find the additional funds needed.

B. Use the cash account to balance the balance sheet. Calculate the change in net working capital from Y0 to Y1.

Reference no: EM131812609

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