Question

Part A) You want to invest in HSY, and your main concern is the firm’s ability...

Part A) You want to invest in HSY, and your main concern is the firm’s ability to make payments to shareholders. You know from your Finance 3210 class that you can calculate a firm’s ability to make payments to shareholders without harming operations. Using the attached financial statements, how much can HSY pay to shareholders without harming operations in 2018?

Part B) You are interested in investing in HSY, and one of your major concerns is future growth of the firm. The firm would like to increase sales by 8% in 2019. The firm’s profit margin is 21.51%, and the firm pays out 75% of its earnings in the form of dividends. The firm is prepared to issue up to $5,000,000 in debt to finance the projected increase in sales.

A. How much additional funds, if any, does the firm need to finance the increase in sales for 2019?

B. How much equity must HSY issue, if any, to fund the increase in sales?

Sales $ 7,500,000.00 Operating Costs $ 4,000,000.00 Depreciation $ 800,000.00 EBIT $ 2,700,000.00 Interest $ 98,000.00 EBT $ 2,602,000.00 Taxes (38%) $ 988,760.00 Net Income $ 1,613,240.00

2018

Cash $ 382,179.00 Accounts Payable $ 523,229.00

Accounts Receivable $ 588,262.00 Notes Payable $ 2,920,000.00

Inventory $ 782,836.00 Accruals $ 17,700.00

Total Current Assets $ 1,753,277.00 Total Current Liabilities $ 3,460,929.00

Net Plant and Equipment $ 5,200,000.00 Long-Term Debt $ 2,061,000.00

Total Assets $ 6,953,277.00 Common Equity $ 931,348.00

Retained Earnings $ 500,000.00

Total Liabilities and OE $ 6,953,277.00

2017

Cash $ 482,179.00 Accounts Payable $ 523,229.00

Accounts Receivable $ 528,262.00 Notes Payable $ 2,120,000.00

Inventory $ 732,836.00 Accruals $ 102,700.00

Total Current Assets $ 1,743,277.00 Total Current Liabilities $ 2,745,929.00

Net Plant and Equipment $ 5,200,000.00 Long-Term Debt $ 2,066,000.00

Common Equity $ 931,348.00

Retained Earnings $ 1,200,000.00

Total Assets $ 6,943,277.00 Total Liabilities and OE $ 6,943,277.00

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Homework Answers

Answer #1

Part A. Since the net income of the company is $1,613,240 for 2018 whereas the long term debt on the company is $2,061,000 and as per company law, shareholders are paid after debt holders, hence company cannot make any payment to shareholders as it would be left with no money after paying debt holders.

Part B. Company wants increase the sales for 2019 by 8%, so total sales in 2018 would be equal to $8,100,000. Also the profit margin for the company is 21.51%, so the net profit in that case would be 21.51% * 8,100,000 = $1,742,299

75% of the net profit is paid as dividend

so the amount of dividend in 2019 would be equal to 75% *1,742,299 = $1,306,724 and retained earning would be equal to 1742299-1306724 = 435,575.

ROI in 2018 is equal to 42% keeping the same ROI in 2019, the investment amount comes out to be $4,152,436

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