Question 1
Assume that Premier paper expects the sales to increase by 20% every year over the next 5 years. Net working capital i.e. current assets less current liabilities is estimated as 20% of revenues and investment in net fixed assets will be 25% of revenues. Dividend payout ratio is 60%. The costs will be 90% of revenues and depreciation will be 10% of fixed assets at the start of the year. Interest will be 10% of long-term debt at start of the year. Tax rate is 40%. Analyse the external financing needed for the next 5 years. Assume that any external financing needed will be met through long term borrowing.
- (a) Calculate the depreciation amount and gross fixed asset for the years 2017, 2018, 2019, 2020, 2021 (10 marks)
- (b) Calculate investment in net working capital for the years 2017, 2018, 2019, 2020, 2021 (5 marks)
- (c) Compute the total investment needs for the years 2017, 2018, 2019, 2020, 2021
(5 marks) - (d) Prepare the Pro Forma Income Statement and Balance Sheet for the years 2017, 2018, 2019, 2020, 2021 (30 marks)
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