Question

Green Caterpillar Garden Supplies Inc. has the following end-of-year balance sheet: Green Caterpillar Garden Supplies Inc. Balance Sheet For the Year Ended on December 31 Assets Liabilities Current Assets: Current Liabilities: Cash and equivalents $150,000 Accounts payable Accounts receivable 400,000 Accrued liabilities Inventories 350,000 Notes payable Total Current Assets $900,000 Total Current Liabilities Net Fixed Assets: Long-Term Bonds Net plant and equipment $2,100,000 Total Debt (cost minus depreciation) Common Equity Common stock Retained eamings Total Common Equity Total Assets $3,000,000 Total Liabilities and Equity $250,000 150,000 100,000 $500,000 1,000,000 $1,500,000 800,000 700,000 $1,500,000 $3,000,000 The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Green Caterpillar Garden Supplies Inc. generated $300,000 net income on sales $13,500,000. The firm expects sales to increase by 18% this coming year and also expects to maintain its long-run dividend payout ratio of 35%. Suppose Green Catepillar's assets are fully utilized. Using the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support a firm's expected sales, it is projected that Green Catepillar will require in additional assets. When a firm grows, some liabilities grow spontaneously along with sales. Spontaneous liabilities are a source of capital that the firm will generate internally, so they reduce the need for external capital. How much of the total increase in assets will be supplied by spontaneous liabilities for Green Catepillar this year? O $79,200 $72,000 $68,400 $75,600 In addition, Green Caterpillar Garden Supplies Inc. is expected to generate net income this year. The firm will pay out some of its eamings as dividends but will retain the rest for future asset investment. Again, the more a firm generates internally from its operations, the less it will have to raise externally from the capital markets. Assume that the firm's profit margin and dividend payout ratio are expected to remain constant. Given the preceding information, Green Catepillar expects to generate $ from operations that will be added to its existing retained eamings. (Be sure to round your answer to the nearest whole dollar.) According to the AFN equation and projections for Green Caterpillar Garden Supplies Inc., the firm's AFN is

Answer 1

B CALCULATIONS Vw 13500000 35% CURRENT SALES DIVIDEND PAYOUT PROFIT MARGIN INCREASE IN SALES TOTAL ASSETS 2.22% 18% 3000000 11 12 13 14 540000 1 Increase in Assets necessary to support increase in sales (Increase in Sales Total Assets) 16 2 Increase in Liabilities necessary to support increase in sales (Accounts Payable+Accrued Lia) * Increase in Sales 72000 20 21 22 3 Increase in Retained Earnings 23 24 Net Income (Expected Sales x profit margin) 26 Less Dividend Payout @35% 300000 25 105000 Increase in Retained Earnings 195000 28 29 30 31 273000 4 AFN (1 -2-3)

B CURRENT SALES DIVIDEND PAYOUT PROFIT MARGIN INCREASE IN SALES TOTAL ASSETS CALCULATIONS 13500000 0.35 =300000/13500000 0.18 3000000 12 13 =111*19 14 1 15 16 Increase in Assets necessary to support increase in sales (Increase in Sales x Total Assets) 17 18 2 Increase in Liabilities necessary to support increase in sales =(250000+150000)*19 19 (Accounts Payable+Accrued Lia) Increase in Sales 20 21 22 3 Increase in Retained Earnings 23 24 Net Income 25 (Expected Sales x profit margin) 26 Less Dividend Payout @35% 300000 =124*15 Increase in Retained Earnings =124-126 29 30 31 4 AFN =114-119-128