The most recent financial statements for Moose Tours, Inc., appear below. Sales
ID: 2813595 • Letter: T
Question
The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 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 2015? Assume that fixed assets are sold so that the company has a 100 percent asset utilization
The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 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
Assuming costs vary with sales and a 20 percent increase in sales, the pro forma income statement will look like this:
Sales = 761,000 * 1.20 = 913,200
Costs = 596,000 * 1.20 = 715,200
Other Expense = 17,000 * 1.20 = 20,400
EBIT = 913,200 - 715,200 - 20,400
EBIT = 177,600
Interest = 18,000
EBT = 177,600 - 18,000
EBT = 159,600
Net Income = 159,600 * (1 - 30%)
Net Income = 111,720
The payout ratio is constant, so the dividends paid this year is the payout ratio from last year times net income, or:
Dividends = (20,800 / 91,000) * (111,720)
Dividends = 25,536
And the addition to retained earnings will be:
Addition to retained earnings= 111,720 - 25,536
Addition to retained earnings= 86,184
The new retained earnings on the pro forma balance sheet will be:
New retained earnings = 232,120 + 86,184
New retained earnings = 318,304
We will calculate full capacity sales, which is:
Full capacity sales = 761,000 / 0.80
Full capacity sales = 951,250
The full capacity ratio at full capacity sales is:
Full capacity ratio = Fixed assets / Full capacity sales
Full capacity ratio = 450,000 / 951,250
Full capacity ratio = 0.473062
The fixed assets required at full capacity sales is the full capacity ratio times the projected sales level:
Total fixed assets = 0.473062 * (913,200)
Total fixed assets = 432,000
Now pro: forma balance sheet will be:
Assets:
Cash = 22,040 * 1.20
Cash = 26,448
Account recievable = 34,360 * 1.20
Account recievable = 41,232
Inventory = 71,320 * 1.20
Inventory = 85,584
Total current Asset = 153,264
Fixed Asset: Net Plant and Equipment = 450,000 * 1.20
Fixed Asset: Net Plant and Equipment = 540,000
Total Assets = 693,264
Liabilities and Owners’ Equity:
Current liabilities:
Accounts payable = 56,200 * 1.20
Accounts payable = 67,440
Notes Payable = 15,400
Current liabilites = 67,440 + 15,400
Current liabilites = 82,840
Long term debt = 144,000
Owner Equity:
Common stock and paid-in surplus = 130,000
Retained Earnings = 318,304
Total owner equity = 130,000 + 318,304
Total owner equity = 448,304
Total Liability and Equity = 82,840 + 144,000 + 448,304
Total Liability and Equity = 675,144
EFN = (153,264 + 432,000) - 675,144
EFN = -89,880