Question

e following tables summarizes the 2019 income statement and end-year balance sheet of Drake's Bowling Alleys. Drake nager forecasts a 15% increase in sales and costs in 2020. The ratio of sales to average assets is expected to remain at erest is forecasted at 3% of debt at the start of the year. Sales Costs Interest Pretax profit Tax Net income INCOME STATEMENT, 2019 (Figures in $ thousands) $1,800 (50% of average assets) 900 (50% of sales) 18 (3% of debt at start of year) $ 176 (20% of pretax profit) $ 706 882 Assets at the end of 2018 were $3,500,000. Debt at the end of 2018 was $610,000 Assets BALANCE SHEET, YEAR-END (Figures in $ thousands) $ 3,700 Debt Equity $ 3,700 $ 610 3,090 $3,700 Total a. What is the implied level of assets at the end of 2020? (Do not round your intermediate calculations. Enter your answer thousands.) b. If the company pays out 50% of net income as dividends, how much cash will Drake's need to raise in the capital markets in (Do not round your intermediate calculations. Enter your answer in thousands.) c. If Drake's is unwilling to make an equity issue, what will be the debt ratio at the end of 2020? (Do not round your intermed calculations. Round your answer to 2 decimal places.) < Prey 5 of 8 !!! Next > sine for Business Calculator - Calcula

Answer 1

a. Implied level of assets = 4580

Workings:

Implied level of sales in 2020= 1800 * 115% = 2070

Let the implied level of assets in 2020 be x

2070 = 50% *( 3700+ x) /2

x= 4580

b. Cash needed to raise = 473

Workings:

Assets	4580	Debt	610
		Equity	3090
		Retained earnings	407
		New equity required	473
Total	4580	Total	4580

Sales	2070
Costs	1035	[4580*50%]
Interest	18.3	[610*3%]
Pretax profit	1017
Tax	203	[2271.7*20%]
Net income	813
Dividends	407	[813*50%]
Retained earnings	407

c. Debt ratio = (610+473) / 4580 = 23.65%