. Upton Computers makes bulk purchases of small computers, stocks them in conveniently
located warehouses, ships them to its chain of retail stores, and has a staff to advise customers
and help them set up their new computers. Upton’s balance sheet as of December 31, 201, is
shown in the book.
Sales for 2010 were $350 million and net income for the year was $10.5 million, so the firm’s
profit margin was 3%. Upton paid dividends of $4.2 million to common stockholders, so its
payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all
assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio
remain constant in 2011.
Ans
a. If sales are projected to increase by $70 million, or 20%, during 2011, use the
AFN equation to determine Upton’s projected external capital requirements.
The AFN for 2011 would be $13.44 million as shown below:
AFN = (122.)(70) - (17.) (70) - 420(0.03)(1 - 0.4)
= (0.35) (70) - (0.05) (70) - (12.6)(0.6)
= 24.5 - 3.5 - 7.56
= 13.44 million
b. Using the AFN equation, determine Upton’s self-supporting growth rate. That is,
what is the maximum growth rate the firm can achieve without having to employ
nonspontaneous external funds?
The self-supporting growth rate would be 7.8% as shown below:
0.03 ( 1−0.4 ) (350)
g=
122.5−35.5−(0.03 ( 1−0.4 )( 350 ))
6.3
¿
87−6.3
6.3
¿
80.7
= 0.078 or 7.8%
located warehouses, ships them to its chain of retail stores, and has a staff to advise customers
and help them set up their new computers. Upton’s balance sheet as of December 31, 201, is
shown in the book.
Sales for 2010 were $350 million and net income for the year was $10.5 million, so the firm’s
profit margin was 3%. Upton paid dividends of $4.2 million to common stockholders, so its
payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all
assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio
remain constant in 2011.
Ans
a. If sales are projected to increase by $70 million, or 20%, during 2011, use the
AFN equation to determine Upton’s projected external capital requirements.
The AFN for 2011 would be $13.44 million as shown below:
AFN = (122.)(70) - (17.) (70) - 420(0.03)(1 - 0.4)
= (0.35) (70) - (0.05) (70) - (12.6)(0.6)
= 24.5 - 3.5 - 7.56
= 13.44 million
b. Using the AFN equation, determine Upton’s self-supporting growth rate. That is,
what is the maximum growth rate the firm can achieve without having to employ
nonspontaneous external funds?
The self-supporting growth rate would be 7.8% as shown below:
0.03 ( 1−0.4 ) (350)
g=
122.5−35.5−(0.03 ( 1−0.4 )( 350 ))
6.3
¿
87−6.3
6.3
¿
80.7
= 0.078 or 7.8%
