Question

These are your financial statements for the year ending today: BALANCE SHEET Cash Receivables Inventories Total Current Assets Net Fixed Assets $ 340,000 4,200,000 4,960,000 $ 9,500,000 2.500.000 Accounts Payable Accruals Notes Payable Total Current Liabilities Long-term Debt Common Stock Retained Earnings Total Liabilities and Equity $ 2,720,000 980,000 1.300.000 $ 5,000,000 2,000,000 3,800,000 1.200.000 $12,000,000 Total Assets $12,000,000 INCOME STATEMENT Sales Less: Operating costs EBIT Less: Interest EBT Less: Taxes (40%) Net Income Less: Dividends Additions to Retained Earnings $36,500,000 29,200,000 $ 7,300,000 500.000 $ 6,800,000 2.720.000 $ 4,080,000 3,500,000 $ 580,000 • You expect sales to increase 25% next year. Assume you are currently operating at 90% capacity Interest expense next year will be 10% of any interest-bearing debt balance at the beginning of the year Dividends will double next year Operating costs are 50% fixed and 50% variable Days Sales Outstanding are expected to increase by 6 days next year (365 day year) Days Payables Outstanding are expected to increase by 2 days next year Cash is expected to remain constant next year Using a pro forma income statement to estimate the additions to retained earnings, how much external funds do you project needing to support the 25% sales growth? If the additional funds were raised using long-term debt, immediately, how would that affect your additional funds estimate? Project your income statement and balance sheet under both scenarios: first estimate and second estimate

Answer 1

			Last Year	Projected next year
		Sales	$36,500,000	$45,625,000	(36500000*1.25)
		Less: Operating Costs	$29,200,000	$32,850,000	(0.5*29200000+1.25*0.5*29200000)
		EBIT	$7,300,000	$12,775,000
		Less:Interest	$500,000	$330,000	(10%*(1300000+2000000)
		EBT	$6,800,000	$12,445,000
		Less:Taxes(40%)	$2,720,000	$4,978,000
		Net Income	$4,080,000	$7,467,000
		Less:Dividends	$3,500,000	$7,000,000	(2*3500000)
		Addition to retained Earnings	$580,000	$467,000
		Sales last year	$36,500,000
		Capacity utilization	90%
		Sales at 100% Capacity utilization	$40,555,556	(36500000/0.9)
		Increase in Sales with respect to 100% Capacity	$5,069,444	(45625000-40555556)
		Percentage increase wrt 100% Capacity Sales	12.50%	(5069444/40555556)
		Last Year days Sales outstanding	42.00	(365/(36500000/4200000)
		Projected Days Sales Outstanding	48.00	(42+6)
		Projected Receivables	$6,000,000	(45625000/365)*48
		Last Year days Payable outstanding	34.00	(365/(29200000/2720000)
		Projected Days Payable Outstanding	36.00	(34+2)
		Projected Accounts Payable	$3,240,000	(32850000/365)*36
			A			C
		Item	Present Level			Projected Level
		Cash	$340,000		Cash	$340,000
		Receivables	$4,200,000		Receivables	$6,000,000
		Inventories	$4,960,000		Inventories	$6,200,000	(1.25*4960000)
		Total Current asset	$9,500,000		Total Current asset	$12,540,000
		Net Fixed asset	$2,500,000		Net Fixed asset	$2,812,500	(2500000*1.1250)
		Total Assets	$12,000,000		Total Assets	$15,352,500
		Accounts Payable	$2,720,000		Accounts Payable	$3,240,000
		Accruals	$980,000		Accruals	$1,225,000	(1.25*980000)
		Notes Payable	$1,300,000		Notes Payable	$1,300,000
		Total current liabilities	$5,000,000		Total current liabilities	$5,765,000
		Long termDebt	$2,000,000		Long termDebt	$2,000,000
		TotalLiabilities	$7,000,000		Total Liabilities	$7,765,000
		Common Stock	$3,800,000		Common Stock	$3,800,000
		Retained earnings	$1,200,000		*Retained earnings	$1,667,000	(1200000+467000)
		Total Equity	$5,000,000		Total Equity	$5,467,000
					Additional Fund Needed	$2,120,500
		Total Liabilities+Equity	$12,000,000		Total Liabilities+Equity	$13,232,000
					Increase in Fixed asset	$312,500
					Increase in Current asset	$3,040,000
					Increase in Current Liabilities	$765,000
					Increase in fund requirement	$2,587,500	(312500+3040000-765000)
					Amount available from Retained Earnings	$467,000
					Additional Fund Needed	$2,120,500
								Additional Fund Needed $2,120,500 If there is immediate increase in Long term Debt Sales Less: Operating Costs EBIT Less:Interest ЕВТ Less:Taxes(40%) Net Income Less:Dividends Addition to retained Earnings Projected next Last Year year $36,500,000 $45,625,000 (36500000*1.25) $29,200,000 $32,850,000 (0.5*29200000+1.25*0.5*29200000) $7,300,000 $12,775,000 $500,000 $542,050 (1095*(1300000+2000000+2120500) $6,800,000 $12,232,950 $2,720,000 $4,893,180 $4,080,000 $7,339,770 $3,500,000 $7,000,000 (2*3500000) $580,000 $339,770 Addition to retained Earnings $580,000 $339,770 Item Cash Receivables Inventories Total Current asset Net Fixed asset Total Assets Present Level $340,000 $4,200,000 $4,960,000 $9,500,000 $2,500,000 $12,000,000 Cash Receivables Inventories Total Current asset Net Fixed asset Total Assets Projected Level $340,000 $6,000,000 $6,200,000 (1.25*4960000) $12,540,000 $2,812,500 (2500000*1.1250) $15,352,500 Accounts Payable Accruals Notes Payable Total current liabilities Long term Debt TotalLiabilities $2,720,000 $980,000 $1,300,000 $5,000,000 $2,000,000 $7,000,000 Accounts Payable Accruals Notes Payable Total current liabilities Long term Debt Total Liabilities $3,240,000 $1,225,000 (1.25*980000) $1,300,000 $5,765,000 $4,120,500 (2000000+2120500 $9,885,500 Common Stock Retained earnings Total Equity $3,800,000 $1,200,000 $5,000,000 Common Stock *Retained earnings Total Equity Additional Fund Needed Total Liabilities+Equity $3,800,000 $1,539,770 (1200000+339770) $5,339,770 $127,230 $15,225,270 Total Liabilities+Equity $12,000,000