Why is calculating efn an important role for a cfo

We need to calculate the retention ratio to calculate the sustainable growth rate. The retention ratio is:. Problem 7CTQ Asset Utilization and EFN One of the implicit assumptions we made in calculating the external funds needed was that the company was operating at full capacity. If the company is operating at less than full capacity, how will this affect the external funds needed? It would reduce the external funds needed. If the company is not operating at full capacity, it would be able to increase sales without a commensurate increase in fixed assets.

Problem 7PQ Sustainable Growth Assuming the following ratios are constant, what is the sustainable growth rate? The ROE is:. Which one is more useful for comparing two companies? ROE shows the percentage return for the year earned on shareholder investment.

No dividends are paid. What is the external financing needed? What does this ratio tell us? Why might it be more useful than ROA in comparing two companies? This ratio would show how a company has controlled costs. While taxes are a cost, and depreciation and amortization can be considered costs, they are not as easily controlled by company management. Conversely, depreciation and amortization can be altered by accounting choices. This ratio only uses costs directly related to operations in the numerator.

As such, it gives a better metric to measure management performance over a period than does ROA. Current assets, fixed assets, and short-term debt are 20 percent, percent, and 15 percent of sales, respectively.

Charming Florist pays out 30 percent of its net income in dividends. The profit margin is 12 percent. Based on Ms.

Step-by-step solution step 1 of 3. The long-term debt and common stock will remain constant. We can calculate the addition to retained earnings for the year as:. Return on investment is calculated as net income divided by long-term liabilities plus equity. What do you think return on investment is intended to measure? What is the relationship between return on investment and return on assets? Use the following information to answer the next five questions: A small business called The Grandmother Calendar Company began selling personalized photo calendar kits.

The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expanded capacity, but it still could not keep up with demand. Equipment failed from overuse and quality suffered. Working capital was drained to expand production, and, at the same time, payments from customers were often delayed until the product was shipped. Finally, out of cash, the company ceased operations entirely three years later.

Long-term liabilities and equity are investments made by investors in the company, either in the form of a loan or ownership. Return on investment is intended to measure the return the company earned from these investments. Return on investment will be higher than the return on assets for a company with current liabilities.

To see this, realize that total assets must equal total debt and equity, and total debt and equity is equal to current liabilities plus long-term liabilities plus equity. So, return on investment could be calculated as net income divided by total assets minus current liabilities. Why or why not? If any of the actual parameters in the sustainable growth rate equation differs.

Since the sustainable growth rate includes ROE in the calculation, this also implies that changes in the profit margin, total asset turnover, or equity multiplier will affect the sustainable growth rate. Problem 11CTQ Product Sales Do you think the company would have suffered the same fate if its product had been less popular?

Presumably not, but, of course, if the product had been much less popular, then a similar fate would have awaited due to lack of sales.

Return on Equity Firm A and Firm B have debt-total asset ratios of 40 percent and 30 percent and returns on total assets of 12 percent and 15 percent, respectively. Which firm has a greater return on equity?

In the context of the cash flow analysis we developed in Chapter 2, what was the impact of customers not paying until orders were shipped? Since customers did not pay until shipment, receivables rose.

At the same time, costs were rising faster than cash revenues, so operating cash flow declined. Thus, all three components of cash flow from assets were negatively impacted. Does the fact that these figures are quoted in a foreign currency make any difference?

What was the net loss in dollars? The net income in dollars is:. Financing possibly could have been arranged if the company had taken quick enough action. Sometimes it becomes apparent that help is needed only when it is too late, again emphasizing the need for planning.

Can Optical Scam eliminate the need for external funds by changing its dividend policy? What other options are available to the company to meet its growth objectives? Step-by-step solution step 1 of 4. The company does have several alternatives. It can increase its asset This will decrease the equity account, thereby increasing ROE. The company could also increase the debt in its capital structure. Cash Flow Which was the biggest culprit here: Too many orders, too little cash, or too little production capacity?

All three were important, but the lack of cash or, more generally, financial resources, ultimately spelled doom. An inadequate cash resource is usually cited as the most common cause of small business failure.

It is often easier to look backward to determine where to start. To calculate receivables turnover, we need credit sales, and to find credit sales, we need total sales. Since we are given the profit margin and net income, we can use these to calculate total sales as:. Cash Flow What are some actions a small company like The Grandmother Calendar Company can take besides expansion of capacity if it finds itself in a situation in which growth in sales outstrips production?

Demanding cash upfront, increasing prices, subcontracting production, and improving financial resources via new owners or new sources of credit are some of the options. When orders exceed capacity, price increases may be especially beneficial. The solution to this problem requires a number of steps. Using the numbers given for the current ratio and the current liabilities, we solve for CA:.

To find the total assets, we must first find the total debt and equity from the information given. So, we find the net income using the profit margin:. The tax rate was 34 percent. This problem requires you to work backward through the income statement. Plugging in the numbers given and solving for EBT, we get:. What is the cost of goods sold for the company? The only ratio given which includes cost of goods sold is the inventory turnover ratio, so it is the last ratio used.

Since current liabilities are given, we start with the current ratio:. Businesses can access a range of sources to raise capital, including banks, credit vehicles such as lines of credit, bonds and the sale of stock. Small businesses may rely on venture capital, small investors and even friends and family members.

In order to calculate EFN, you first need to collect the necessary data. Typically, this is accomplished by preparing a pro forma income statement that covers the period for which you want to figure EFN. Start with the current income statement and make a realistic estimate of sales and costs for the period.

Assume the same profit margin as the current income statement. The project for which you want to know EFN will be completed within the next year.

Assets must equal the sum of liabilities and owner's or shareholders equity on a normal balance sheet. However, assets on a pro forma balance sheet created to calculate EFN will exceed the sum of liabilities and equity. The difference is the external financing needed. Additional funds needed AFN is the amount of money a company must raise from external sources to finance the increase in assets required to support increased level of sales.

Additional funds needed AFN is also called external financing needed. Additional funds needed method of financial planning assumes that the company's financial ratios do not change. In response to an increase in sales, a company must increase its assets, such as property, plant and equipment, inventories, accounts receivable, etc.

Part of this increase is offset by spontaneous increase in liabilities such as accounts payable, taxes, etc.