I would like someone to go over and see if I used the right
configurations, ratios... etc. If not, please explain where I went
wrong.
2005 Income Statement:
Sales $1,000 (40% of average assets)
Costs 750 (75% of sales)
Interest 25 (5% of debt as start of year)
______
Pretax Profit 225
Tax 90 (40% of pretax profit)
Net Income $ 135
Balance Sheet:
Assets $2600 Debt $500
Equity 2100
Total $2600 $2600
Summarizes the 2005 income statement and end-year balance sheet of
Drake?s Bowling Alleys. Drake?s financial manager forecasts a 10
percent increase in sales and costs in 2006. The ratio of sales to
average assets is expected to remain at .40. Interest is forecasted at
5 percent of debt at start of year.
1) What is the implied level of assets at the end of 2006?
Assets = 2600
Sales = 1,100 (with 10% increase)
Cost = 825 (with 10% increase)
Implied level of Assets = 2,860
2) If the company pays out 50 percent of net income as dividends, how
much cash will
Drake need to raise in the capital markets in 2006?
Net income = $135 50% = $67.5
Drake will need to use a Profitability ratio, to assist with the determination:
After Drake pays out, this will leave $67,500
Drake will need to raise by 6 ? 7%
3) If Drake is unwilling to make an equity issue, what will be the
debt ratio at the end
of 2006?
Debt ratio = (LT debt +Leases) / (LT debt + Leases + Equity)
There is no mention of leases so:
500/500+2100 = 0.19 or 19%
 I could use some help again...
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