FIN 300 Lecture 6: FIN 300 crib sheet ch. 1-6
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The following tables are the income statement and balance sheet for Company X for year 2016.
| Income Statement: | |||
| 2016 | |||
| Sales | 3,045,600 | ||
| Costs except Depr. | (1,756,300) | ||
| EBITDA | 1,289,300 | ||
| Depreciation | (99,000) | ||
| EBIT | 1,190,300 | ||
| Interest Expense (net) | (58,000) | ||
| Pretax Income | 1,132,300 | ||
| Income Tax | (396,305) | ||
| Net Income | 735,995 |
| Balance Sheet | |||
| 2016 | |||
| Assets | |||
| Cash and Equivalents | 500,000 | ||
| Accounts Receivable | 780,000 | ||
| Inventories | 100,000 | ||
| Total Current Assets | 1,380,000 | ||
| Property Plant and Equipment | 1,700,000 | ||
| Total Assets | 3,080,000 | ||
| Liabilities and Equity | |||
| Accounts Payable | 667,000 | ||
| Debt | 200,000 | ||
| Total Liabilities | 867,000 | ||
| Stockholders' Equity | 2,213,000 | ||
| Total Liabilities and Equity | 3,080,000 |
The executives at Company X believe the sales for the company will grow during 2017 in 8%, compared to 2016. Calculate the pro-forma financial statements for Company X for 2017 using the percent sales method. To do this assume that the percentage values with respect to sales of the (i) costs except depreciation, (ii) depreciation, (iii) cash and equivalents, (iv) accounts receivable, (v) inventories, (vi) property, plant and equipment, and (vi) accounts payable will stay fixed at the values corresponding for 2016. Assume also that the interest expense and debt will not change in 2017 from its 2016 values, income tax will remain at 35% of the Pretax Income and that in 2017 Company X initially plans to payout 24% of its net income to its shareholders.
a. What is the forecasted value of sales for 2017?
b. What is the forecasted value of net income for 2017?
c.What is the forecasted value of total assets for 2017?
d. What is the forecasted value of total liabilities for 2017?
e. What is the forecasted value of net new financing 2017?
f. What option can the financial manager of Corporation X implement in order to balance total assets and total liabilities and equity for 2017? CHOOSE ONE OPTION ONLY
> Increase the debt by the amount indicated in your calculations of net new financing;
or
> Increase the dividends by the amount indicated in your calculations of net new financing;
(ALL WORK MUST BE DONE ON EXCEL)
Build a financial model on the following template. Assume that the WACC is 20%. Also assume the debt and equity remain the same. The FCF long-term growth rate is the same as the sales growth rate. ( Copy the table into Excel.)
| Sales growth | 10% | |||||
| Current assets/sales | 15% | |||||
| Current liabilities/Sales | 8% | |||||
| Net fixed assets/sales | 77% | |||||
| cost of goods sold/sales | 50% | |||||
| depreciation rate | 10% | |||||
| interest rate on debt | 10% | |||||
| interest paid on cash and marketable securities | 8% | |||||
| tax rate | 40% | |||||
| dividend payout ratio | 40% | |||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| income statement | ||||||
| sales | 1000 | |||||
| cost of goods sold | 500 | |||||
| interest payment on debt | 32 | |||||
| interest earned on cash and marketable securities | 6 | |||||
| depreciation | 100 | |||||
| profits before tax | 374 | |||||
| taxes | 150 | |||||
| profits after tax | 225 | |||||
| dividends | 90 | |||||
| retained earnings | 135 | |||||
| Balance sheet | ||||||
| cash and marketable securities | 80 | |||||
| current assets | 150 | |||||
| fixed assets | ||||||
| At cost | 1070 | |||||
| depreciation | 300 | |||||
| Net fixed assets | 770 | |||||
| total assets | 1000 | |||||
| current liabilities | 80 | |||||
| debt | 320 | |||||
| stock | 450 | |||||
| accumulated retained earnings | 150 | |||||
| total liabilities + Equity | 1000 |
a. Value the companyâs equity. (SHOW YOUR WORK ON EXCEL)
b. The model in Part A includes cost of goods sold but not selling, general, and administrative (SG & A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. Change the model to accommodate this new assumption. Show the resulting income statements, balance sheets, the free cash flows (FCF), and the valuation. (SHOW YOUR WORK ON EXCEL)
c. Build a data table in which you show the sensitivity of the equity value to the level of SG & A. Let SG & A vary from $0 per year to $600 per year. (SHOW YOUR WORK ON EXCEL)
d. Back to Part A. Suppose that the fixed assets at cost follow the following step function:
Incorporate this function into the model and solve for the market value of equity. (SHOW YOUR WORK ON EXCEL)
e. Back to Part A again. Make two changes in the model: 1). Let debt be the plug and keep cash constant at its year-0 level. 2). Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of $0.15. In addition, suppose that it wants this dividend per share to growth in subsequent years by 12% per year. Incorporate these changes into the pro forma model and solve this model to get the market value of equity per share. (SHOW YOUR WORK ON EXCEL)
Additional funds needed
Morrissey Technologies Inc.'s 2012 financial statements are shown here.
| Morrissey Technologies Inc.: Balance Sheet as of December 31, 2012 | ||||
| Cash | $180,000 | Accounts payable | $360,000 | |
| Receivables | 360,000 | Notes payable | 56,000 | |
| Inventories | 720,000 | Accrued liabilities | 180,000 | |
| Total current assets | $1,260,000 | Total current liabilities | $596,000 | |
| Long-term debt | 100,000 | |||
| Fixed assets | 1,440,000 | Common stock | 1,800,000 | |
| Retained earnings | 204,000 | |||
| Total assets | $2,700,000 | Total liabilities and equity | $2,700,000 | |
| Morrissey Technologies Inc.: Income Statement for December 31, 2012 | |||
| Sales | $3,600,000 | ||
| Operating costs including depreciation | 3,279,720 | ||
| EBIT | $320,280 | ||
| Interest | 20,280 | ||
| EBT | $300,000 | ||
| Taxes (40%) | 120,000 | ||
| Net Income | $180,000 | ||
| Per Share Data: | |||
| Common stock price | $45.00 | ||
| Earnings per share (EPS) | $1.80 | ||
| Dividends per share (DPS) | $1.08 | ||
Suppose that in 2013, sales increase by 15% over 2012 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2012 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its Operating costs/Sales ratio to 89.5% and increase its total debt-to-assets ratio to 30%. (It believes that its current debt ratio is too low relative to the industry average.) The firm will raise 30% of 2013 forecasted total debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short-term and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.
- Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent.
Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2013 2012 2013 Pro Forma Sales $3,600,000 $ Operating costs (includes depreciation) 3,279,720 $ EBIT $320,280 $ Interest expense 20,280 $ EBT $300,000 $ Taxes (40%) 120,000 $ Net Income $180,000 $ Dividends $ $ Addition to RE $ $ Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2013 2012 2013 Pro Forma Cash $180,000 $ Accounts receivable 360,000 $ Inventories 720,000 $ Fixed assets 1,440,000 $ Total assets $2,700,000 $ Payables + accruals $540,000 $ Short-term bank loans 56,000 $ Total current liabilities $596,000 $ Long-term bonds 100,000 $ Total debt $696,000 $ Common stock 1,800,000 $ Retained earnings 204,000 $ Total common equity $2,004,000 $ Total liab. and equity $2,700,000 $ - If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In otherwords, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places.
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