Chapter: 12 Problem: 10 Start with the partial model in the file Ch12 P10 Build
ID: 2487496 • Letter: C
Question
Chapter: 12 Problem: 10 Start with the partial model in the file Ch12 P10 Build a Model.xls on the textbook’s Web site, which contains the 2013 financial statements of Zieber Corporation. Forecast Zeiber's 2014 income statement and balance sheets. Use the following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, and inventories to sales will be the same in 2014 as in 2013. (3) Zeiber will not issue any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt and the interest expense on long-term debt is based on the average balance during the year . (5) No interest is earned on cash. (6) Dividends grow at an 8% rate. (6) Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by drawing on a line of credit with an interest rate of 12%. Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit. If surplus funds are available, pay a special dividend. a. What are the forecasted levels of notes payable and special dividends? Key Input Data: Used in the forecast Tax rate 40% Dividend growth rate 8% Rate on notes payable-term debt, rstd 9% Rate on long-term debt, rd 11% Rate on line of credit, rLOC 12% December 31 Income Statements: (in thousands of dollars) Forecasting 2013 2014 2014 2013 basis Ratios Inputs Forecast Sales $455,150 Growth 6.00% $482,459 Expenses (excluding depr. & amort.) $386,878 % of sales 85.000% 85.00% Depreciation and Amortization $14,565 % of fixed assets 8.000% 8.00% EBIT $53,708 Interest expense on long-term debt $11,880 Interest rate x average debt during year Interest expense on line of credit $0 EBT $41,828 Taxes (40%) $16,731 Net Income $25,097 Common dividends (regular dividends) $12,554 Growth 8.00% Special dividends $0 Addition to retained earnings (DRE) $12,543 December 31 Balance Sheets (in thousands of dollars) Forecasting 2013 2014 2014 2013 basis Ratios Inputs Without adj. Adj. Assets: Cash $18,206 % of sales Accounts Receivable $100,133 % of sales Inventories $45,515 % of sales Total current assets $163,854 Fixed assets $182,060 % of sales Total assets $345,914 Liabilities and equity Accounts payable $31,861 % of sales Accruals $27,309 % of sales Line of credit $0 Previous Total current liabilities $59,170 Long-term debt $120,000 Previous Total liabilities $179,170 Common stock $60,000 Previous Retained Earnings $106,745 Previous + DRE Total common equity $166,745 Total liabilities and equity $345,914 Increase in spontaneous liabilities (accounts payable and accruals) + Increase in long-term bonds, preferred stock and common stock + Net income minus regular common dividends Increase in financing Increase in total assets Amount of deficit or surplus financing: If deficit in financing (negative), draw on line of credit If surplus in financing (positive), pay special dividend a. What are the forecasted levels of the line of credit and special dividends? Required line of credit Note: we copied values from G78:G79 when sales growth in G32 = 6%. Special dividends b. Now assume that the growth in sales is only 3%. What are the forecasted levels of line of credit and special dividends? Required line of credit Note: we copied values from G78:G79 when sales growth in G32 = 3%. Special dividends Chapter: 12 Problem: 10 Start with the partial model in the file Ch12 P10 Build a Model.xls on the textbook’s Web site, which contains the 2013 financial statements of Zieber Corporation. Forecast Zeiber's 2014 income statement and balance sheets. Use the following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, and inventories to sales will be the same in 2014 as in 2013. (3) Zeiber will not issue any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt and the interest expense on long-term debt is based on the average balance during the year . (5) No interest is earned on cash. (6) Dividends grow at an 8% rate. (6) Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by drawing on a line of credit with an interest rate of 12%. Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit. If surplus funds are available, pay a special dividend. a. What are the forecasted levels of notes payable and special dividends? Key Input Data: Used in the forecast Tax rate 40% Dividend growth rate 8% Rate on notes payable-term debt, rstd 9% Rate on long-term debt, rd 11% Rate on line of credit, rLOC 12% December 31 Income Statements: (in thousands of dollars) Forecasting 2013 2014 2014 2013 basis Ratios Inputs Forecast Sales $455,150 Growth 6.00% $482,459 Expenses (excluding depr. & amort.) $386,878 % of sales 85.000% 85.00% Depreciation and Amortization $14,565 % of fixed assets 8.000% 8.00% EBIT $53,708 Interest expense on long-term debt $11,880 Interest rate x average debt during year Interest expense on line of credit $0 EBT $41,828 Taxes (40%) $16,731 Net Income $25,097 Common dividends (regular dividends) $12,554 Growth 8.00% Special dividends $0 Addition to retained earnings (DRE) $12,543 December 31 Balance Sheets (in thousands of dollars) Forecasting 2013 2014 2014 2013 basis Ratios Inputs Without adj. Adj. Assets: Cash $18,206 % of sales Accounts Receivable $100,133 % of sales Inventories $45,515 % of sales Total current assets $163,854 Fixed assets $182,060 % of sales Total assets $345,914 Liabilities and equity Accounts payable $31,861 % of sales Accruals $27,309 % of sales Line of credit $0 Previous Total current liabilities $59,170 Long-term debt $120,000 Previous Total liabilities $179,170 Common stock $60,000 Previous Retained Earnings $106,745 Previous + DRE Total common equity $166,745 Total liabilities and equity $345,914 Increase in spontaneous liabilities (accounts payable and accruals) + Increase in long-term bonds, preferred stock and common stock + Net income minus regular common dividends Increase in financing Increase in total assets Amount of deficit or surplus financing: If deficit in financing (negative), draw on line of credit If surplus in financing (positive), pay special dividend a. What are the forecasted levels of the line of credit and special dividends? Required line of credit Note: we copied values from G78:G79 when sales growth in G32 = 6%. Special dividends b. Now assume that the growth in sales is only 3%. What are the forecasted levels of line of credit and special dividends? Required line of credit Note: we copied values from G78:G79 when sales growth in G32 = 3%. Special dividendsExplanation / Answer
The complete model is given below:
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Part a)
Required Line of Credit = $4,525
Special Dividends = $0
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Part b)
Required Line of Credit = 4,525 - 3%*4,525 = $4,389
Special Dividends = $0
Income Statements: 2013 2013 Historical ratios Forecasting basis 2014 Input ratios 2014 Preliminary forecast (doesn't include special dividend or LOC) 2014 Final forecast (includes special dividend or LOC) (December 31, in thousands of dollars) Sales $455,150 Growth 6.0% $482,459 $482,459 Expenses (excluding depr. & amort.) $386,878 85.0% % of sales 85.0% $410,090 $410,090 Depreciation and Amortization $14,565 8.0% % of fixed assets 8.0% $15,439 $15,439 EBIT $53,708 $56,930 $56,930 Interest expense on long-term debt $11,880 Interest rate x average debt during year $13,200.00 $13,200 Interest expense on line of credit $0 $0 $542.99 EBT $41,828 $43,730 $43,187 Taxes (40%) $16,731 $17,492.06 $17,274.87 Net Income $25,097 $26,238 $25,912 Common dividends (regular dividends) $12,554 Growth 8.00% $13,558 $13,558 Special dividends Zero in preliminary forecast $0 $0 Addition to retained earnings $12,543 $12,680 $12,354