Forecasted Statements and Ratios Upton Computers makes bulk purchases of small c
ID: 2740537 • Letter: F
Question
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, 2015, is shown here (millions of dollars):
Sales for 2015 were $450 million and net income for the year was $13.5 million, so the firm's profit margin was 3.0%. Upton paid dividends of $5.4 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 2016. Do not round intermediate calculations.
a) If sales are projected to increase by $60 million, or 13.33%, during 2016, 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
b) 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.
????????%
c) Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2016. 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 2016 as they were in 2015. What is the amount of the line of credit reported on the 2016 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 2016 addition to retained earnings for the balance sheet.) Round your answers to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.
Explanation / Answer
AFN = (A*/S)(DS) – (L*/S)(DS) – MS1(1 – d)
= ($70) - ($70) - ($420)(0.6) = $13.44 millb.
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Upton Computers
Pro Forma Balance Sheet
December 31, 2010
(Millions of Dollars)
Forecast Pro Forma
Basis % after
2004 2005 Sales Additions Pro Forma Financing Financing
Cash $ 3.5 0.0100 $ 4.20 $ 4.20
Receivables 26.0 0.7430 31.20 31.20
Inventories 58.0 0.1660 69.60 69.60
Total current
assets $ 87.5 $105.00 $105.00
Net fixed assets 35.0 0.100 42.00 42.00
Total assets $122.5 $147.00 $147.00
Accounts payable $ 9.0 0.0257 $ 10.80 $ 10.80
Notes payable 18.0 18.00 +13.44 31.44
Accruals 8.5 0.0243 10.20 10.20
Total current
liabilities $ 35.5 $ 39.00 $ 52.44
Mortgage loan 6.0 6.00 6.00
Common stock 15.0 15.00 15.00
Retained earnings 66.0 7.56* 73.56 73.56
Total liab.
and equity $122.5 $133.56 $147.00
AFN = $ 13.44
*PM = $10.5/$350 = 3%.
Payout = $4.2/$10.5 = 40%.
NI = $350 ´ 1.2 ´ 0.03 = $12.6.
Addition to RE = NI - DIV = $12.6 - 0.4($12.6) = 0.6($12.6) = $7.56.