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In the Industrial Supply Company example (Table 4.4) it was assumed that the company’s fixed assets were being used at nearly full capacity and that net fixed assets would have to increase proportionately as sales increased. Alternatively, suppose that the company has excess fixed assets and that no increase in net fixed assets is required as sales are increased. Assume that the company plans to maintain its divi- dend payments at the same level in 2014 as in 2013. Determine the amount of addi- tional financing needed for 2014 under each of the following conditions:

Increase In Sales Increase In Expenses
a. 3,750,000 3,750,000
b. 3,000,000 2,800,000
c. 4,500,000 4,000,000

Table 4.4

Industrial Supply Financial Statements

Balance Sheet

Actual

December 31, 2013

Pro Forma

December 31, 2013

Comments

Assets

Cash

500,000

625,000

25% Increase (assumption)

Accounts Rec.

2,000,000

2,500,000

25% Increase (assumption)

Inventories

4,000,000

5,000,000

25% Increase (assumption)

Total Current Assets

6,500,000

8,125,000

Fixed Assets, net

1,000,000

1,250,000

Total Assets (A)

7,500,000

9,375,000

25% Increase (assumption)

Liabilities and Equities

Accounts Payable (CL)

1,500,000

1,875,000

25% Increase (assumption)

Notes Payable

1,000,000

1,750,000

1,000,000 + AFN =

1,000,000 + 750,000

Total Current liabilities

2,500,000

3,625,000

Long-term Debt

500,000

500,000

No change (assumption)

Income Statement

2013

2014

Sales (S)

15,000,000

18,750.000

25% Increase (assumption)

Expenses, including interests & taxes

14,250,000

17,750,000

Forecasted

Earnings after taxes (EAT)

750,000

1,000,000

Dividends paid (D)

250,000

250,000

No change (assumption)

Retained earnings

5000,000

750,000

Selected Financial Ratios

Current Ratio

2.60 times

2.24 Times

Decreased

Debt Ratio

40%

44%

Increased

Return on stockholders’ equity

16.7%

19.0%

Increased

Net Profit margin on sales

5.0%

5.33%

Increased

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Deanna Hettinger
Deanna HettingerLv2
29 Sep 2019

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Problem 12-7
Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2013, is shown here (millions of dollars):

Cash $ 3.5 Accounts payable $ 9.0
Receivables 26.0 Notes payable 18.0
Inventories 58.0 Line of credit 0
Total current assets $ 87.5 Accruals 8.5
Net fixed assets 35.0 Total current liabilities $ 35.5
Mortgage loan 6.0
Common stock 15.0
Retained earnings 66.0
Total assets $122.5 Total liabilities and equity $122.5

Sales for 2013 were $375 million and net income for the year was $11.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.5 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio remain constant in 2014. Do not round intermediate calculations.

If sales are projected to increase by $70 million, or 18.67%, during 2014, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
%

Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2014. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
Assume Upton's profit margin and dividend payout ratio will be the same in 2014 as they were in 2013. What is the amount of the line of credit reported on the 2014 forecasted balance sheets? (Hint: You don't need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2014 addition to retained earnings for the balance sheet.) Round your answers to the nearest cent.

Upton Computers
Pro Forma Balance Sheet
December 31, 2014
(Millions of Dollars)
Cash $
Receivables $
Inventories $
Total current assets $
Net fixed assets $
Total assets $
Accounts payable $
Notes payable $
Accruals $
Total current liabilities $
Mortgage loan $
Common stock $
Retained earnings $
Total liabilities and equity $

Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects earning after taxes during the next year to equal $400,000. During the past several years, the company has been paying $50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Baldwin during 2013 follow:

Balance Sheet

Cash - 200,000 Acct payable - 600,000

Acct Receivable - 400,000 Notes payable - 500,000

Inventories - 1,200,000 Long-term debt - 200,000

Fixed assets, net - 500,000 Stockholders' equity - 1,000,000

Total assets - 2,300,000 Total Liabilities and equity - 2,300,000

A- Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2014, assuming that a sales level of $6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable.

B- Suppose that the Baldwin Products' management feels that the average collection period on its additional sales - that is, sales over $4 million--will be 60 days, instead of the current level. By what amount will this increase in the average collection period increase the financing needed by the company over the next year?

C - Uf the Baldwin Products' banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?

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