Cash 320 Receivables 1600 Inventories 2400 Total Current Assets 4320 Fixed Asset
ID: 2710152 • Letter: C
Question
Cash 320 Receivables 1600 Inventories 2400 Total Current Assets 4320 Fixed Assets 2400 Total Assets 6720 AP 240 NP 400 Accruals 200 Total Current Liabilities 840 Long Term Debt 1600 Common Stock 1200 Retained Earnings 3080 Total Liabilities and Equity 6720 Sales for ABC were 8000 in 2014. Net income in 2014 was 800, dividends paid were 400, and its tax rate was 40%. ABC is operating at full capacity. Sales are projected to increase to 9200 in 2015. Asset/sales, spontaneous liabilities/sales, profit margin and dividend payout ratio will remain unchanged from 2014.
A) Using the AFN equation, calculate and show the external funds that must be raised in 2015.
B) Show how the external funds (AFN) in 2015 changes if ABC was not operating at full capacity in 2014 and explain the reason for the change.
C) Assume ABC is operating at full capacity. Show the projected balance sheet for 2015 if ABC finances half of its AFN with debt and half with equity. (Put new numbers next to the old ones)
Explanation / Answer
AFN i.e. additional funds needed can be calculated using the formula
AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings
Calculate following ratios in 2014
Asset / Sales = 6720 / 8000 = 0.84
Spontaneous liabilities / sales = (240 + 400 + 200 ) / 8000 = 0.105
Profit margin = 800 / 8000 = 10%
Dividend payout ratio = 400 / 800 = 50%
Since all the above ratios are same in 2015, and sales increased to 9200 in 2015, we can calculate assets, spontaneous liabilities, net income and dividend as follows
Total Assets = (Asset / Sales ) * sales = 0.84 * 9200 = 7728
Spontaneous Liabilities = (Spontaneous Liabilities / Sales) * Sales = 0.105 * 9200 = 966
Net Income = Profit Margin * Sales = 10% * 9200 = 920
Dividend paid = Payout ratio * Net income = 50% * 920 = 460
So AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings
A) AFN = (7728 - 6720) - (966 - 840) - (920 - 460) = 1008 - 126 - 460 = 422
B) If ABC is not operated at full capacity in 2014, in 2015 it can operate ar full capacity which means production units increases with same costs except raw material costs.
C) AFN calculated above is 422
So according to the question new long term debt would be 1600 + 211 = 1811
New Equity would be 1200 + 211 = 1411
Projected balance sheet would be as follows
2014 2015 Total Assets 6720 7728 Current Liabilities 840 966 LT Debt 1600 1811 Common Stock 1200 1411 Retained Earnings 3080 3540 Total 6720 7728