The most recent financial statements for Fleury Inc., follow. Sales for 2012 are
ID: 2415245 • Letter: T
Question
The most recent financial statements for Fleury Inc., follow. Sales for 2012 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.
What is the EFN if the firm was operating at only 80 percent of capacity in 2011? Assume that fixed assets are sold so that the company has a 100 percent asset utilization.
The most recent financial statements for Fleury Inc., follow. Sales for 2012 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.
Explanation / Answer
Fleury Inc. Pro Forma Income Statement Sales (751000 X 1.20) 901,200 Less: Costs (586000 X 1.20) 703,200 Less: Other Exp. (22000 X 1.20) 26,400 EBIT 171,600 Interest 18,000 Taxable Income 153,600 Taxes (40%) 61,440 Net Income 92,160 Payout Ratio is constant. Dividends = (30000 / 75000) X 92160 = $36864 Addition to Retained Earnings = 92160 - 36864 = 55296 New Retained Earnings = 41120 + 55296 = 96416 Fleury Inc. Pro Forma Balance Sheet Assets Amt. Liabilities & Owners' Capital Amt. Current assets Current Liabilities Cash (21040 X 1.20) 25,248 Accounts Payable (55200 X 1.20) 66,240 Accounts Receivables (33360 X 1.20) 40,032 Notes Payable (14400 X 1.20) 17,280 Inventory (70320 X 1.20) 84,384 Total 83,520 Total 149,664 Long term Debt 134,000 Fixed Assets Owners's Equity Net Plant & equipment (240000 X 1.2) 288,000 Common stock and paid-in surplus 120,000 Retained Earnings 96,416 Total 216,416 Total Assets 437,664 Total Liabilities & Owners' Capital 433,936 Now, we have to adjust fixed assets so the company has 100% asset utilization. Full Capacity Sales = 751000 / .80 = $938750 Full Capacity Ratio = Fixed Assets / Full Capacity Sales Full Capacity Ratio = 240000 / 938750 = 0.255659 Fixed Assets Required at Full Capacity sales at full capacity ratio times the projected sales level: Total Fixed Assets = 0.255659 x 901200 = 230400 EFN = [149664 (Current Assets) + 230400 (Total Fixed Assets Required)] - 433936 (total liabilities & owners Capital) EFN = -53872