Question

Problem 4-17 The Haverly Company expects to finish the current year with the following financial results, and is developing its annual plan for next year. Haverly Company Income Statement This Year ($000) 100.0 $80900 34792 $46108 Revenue COGS Gross Margin Expenses: Marketing Engineering Fin & Admin Total Exp. EBIT Interest * $17667 9799 4931 $32397 $13711 2007 $11704 5267 $ 5437 16.9 EBT Inc Tax olir ili Net Income $ 1546 908 Haverly Company Balance Sheet This Year ($000) ASSETS LIABILITIES & EQUITY Cash $ 7761 Accounts payable Accounts 13483 Accruals receivable Inventory 8698 Current assets $29942 Current liabilities Long-term debt Fixed Assets Equity Gross $55904 Stock accounts Accumulated (29325) Retained earnings depreciation Net $26578 Total Equity $ 2454 $17358 $20847 15861 $36708 Total assets $56520 Total L&E $56520 The following facts are available. • Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 40% purchased material. . Currently owned assets will depreciate an additional $1372000 next year. • There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $35 million is expected to grow by 12% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been received. This materials accrual is generally about 9% of the payables balance at year end. • The combined state and federal income tax rate is 45%.

Answer 1

Interest on current and future borrowing will be at a rate of 10 % PLANNING ASSUMPTIONSs Income Statement Items 1. Revenue will grow by 13 % with no change in product mix. Competitive pressure, however, is expected to force some reductions in pricing. 2. The pressure on prices will result in a 2 % deterioration (increase) in the next year's cost ratio. 3. Spending in the marketing department is considered excessive and will be held to 18% of revenue next year. 4. Because of a major development project, expenses in the engineering department will increase by 25 % . 5. Finance and administration expenses will increase by 4%. Assets and Liabilities 6. An enhanced cash management system will reduce cash balances by 5 %. 7. The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.) 8. The inventory turnover ratio (COGS/inventory) will decrease by 0.5x. 9. Capital spending is expected to be $6 million. The average depreciation life of the assets to be acquired is five years. The firm uses straight-line depreciation, and takes a half year in the first year 10. Bills are currently paid in 40 days. Planss are to shorten that to 30 days. 11. A dividend totaling $1 million will be paid next year. No new stock will be sold. Develop next year's financial plan for Haverly on the basis of these assumptions and last year's financial statements. Include a projected income statement, balance sheet and a statement of cash flows. Enter your dollar answers in thousands. For example, an answer of $200 thousands should be entered as 200, not 200000. Round dollar answers and intermediate calculations to the nearest thousand. Round the percentage values to 1 decimal place. Enter all amounts in Income Statement as a positive numbers. Use a minus sign, to indicate a negative cash outflow, or a decrease in cash in Balance Sheet and Cash Flow Statement HAVERLY COMPANY INCOME STATEMENTS ($000) THIS YEAR NEXT YEAR 91417 $80900 Revenue 100.0 100.0 17396 34792 19.0 43 % COGS 74021 Gross Margin $46108 57 81.0 Expenses: 16455 Marketing 18.0 $17667 21.8 % 12249 13.4 % Engineering 9799 12.1 5.6 % Fin & Admin 4931 6.1 5128 Total Exp 33832 38.0 $32397 40 % 12276 $13711 ЕBIT 16.9 13.4 % 2285 2.5 2007 2.5 % Interest 9991 11.0 $11704 ЕВТ 14.5 5267 6.5 5942 6.5 % Inc Tax 4049 4.4 s 6437 Net Income 8 % 26