In the Industrial Supply Company example (Table 4.4) it was assumed that the com
ID: 2653770 • Letter: I
Question
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:
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
Increase In Sales Increase In Expenses a. 3,750,000 3,750,000 b. 3,000,000 2,800,000 c. 4,500,000 4,000,000Explanation / Answer
Solution-
Req. a
Increase in sales $3,750,000; Increase in Exp $3,750,000
Input
Current level of assets
$6,500,000 ($7,500,000 - $1,000,000)
Accounts Receivable + Inventory
Current sales
$15,000,000
Expected sales
$18,750,000 ($15,000,000 + $3,750,000)
Increase in sales
$3,750,000
Growth in sales
25% ($3,750,000 / $15,000,000)
Current Spontaneous liabilities
$1,500,000
Accounts payable
Current expenses
$14,250,000
Expected expenses
$18,000,000 ($14,250,000 +$3,750,000)
Increase in expenses
$3,750,000
Projected Net Income
$750,000 ($18,750,000 - $18,000,000)
Dividends paid
$250,000
Output…
AFN = (A*/S0)S – (L*/S0)S – MS1(RR)
AFN = ((6500000/15000000)*3750000)-(1500000/15000000*3750000)-(750000-250000)
AFN = $750,000
Additional Financing needed for 2014 is $750,000
Req. b
Increase in sales $3,000,000; Increase in Exp $2,800,000
Input
Current level of assets
$6,500,000 ($7,500,000 - $1,000,000)
Accounts Receivable + Inventory
Current sales
$15,000,000
Expected sales
$18,000,000 ($15,000,000 + $3,000,000)
Increase in sales
$3,000,000
Growth in sales
20% ($3,000,000 / $15,000,000)
Current Spontaneous liabilities
$1,500,000
Accounts payable
Current expenses
$14,250,000
Expected expenses
$17,050,000 ($14,250,000 +$2,800,000)
Increase in expenses
$2,800,000
Projected Net Income
$950,000 ($18,000,000 - $17,050,000)
Dividends paid
$250,000
Output…..
AFN = (A*/S0)S – (L*/S0)S – MS1(RR)
AFN = ((6500000/15000000)*3000000)-(1500000/15000000*3000000)-(950000-250000)
AFN = $300,000
Additional Financing needed for 2014 is $300,000
Req. c
Increase in sales $4,500,000; Increase in Exp $4,000,000
Input
Current level of assets
$6,500,000 ($7,500,000 - $1,000,000)
Accounts Receivable + Inventory
Current sales
$15,000,000
Expected sales
$19,500,000 ($15,000,000 + $4,500,000)
Increase in sales
$4,500,000
Growth in sales
30% ($4,500,000 / $15,000,000)
Current Spontaneous liabilities
$1,500,000
Accounts payable
Current expenses
$14,250,000
Expected expenses
$18,250,000 ($14,250,000 +$4,8000,000)
Increase in expenses
$4,000,000
Projected Net Income
$1,250,000 ($19,500,000 - $18,250,000)
Dividends paid
$250,000
Output…..
AFN = (A*/S0)S – (L*/S0)S – MS1(RR)
AFN = ((6500000/15000000)*4500000)-(1500000/15000000*4500000)-(1250000-250000)
AFN = $500,000
Additional Financing needed for 2014 is $500,000
Input
Current level of assets
$6,500,000 ($7,500,000 - $1,000,000)
Accounts Receivable + Inventory
Current sales
$15,000,000
Expected sales
$18,750,000 ($15,000,000 + $3,750,000)
Increase in sales
$3,750,000
Growth in sales
25% ($3,750,000 / $15,000,000)
Current Spontaneous liabilities
$1,500,000
Accounts payable
Current expenses
$14,250,000
Expected expenses
$18,000,000 ($14,250,000 +$3,750,000)
Increase in expenses
$3,750,000
Projected Net Income
$750,000 ($18,750,000 - $18,000,000)
Dividends paid
$250,000