The most recent financial statements for Crosby, Inc., follow. Sales for 2018 ar
ID: 2813915 • Letter: T
Question
The most recent financial statements for Crosby, Inc., follow. Sales for 2018 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.
CROSBY, INC.
2017 Income Statement
Sales $ 980,760
Costs 792,960
Other expenses 20,060
Earnings before interest and taxes $ 167,740
Interest paid 14,740
Taxable income $ 153,000
Taxes (21%) 32,130
Net income $ 120,870
Dividends $ 39,250
Addition to retained earnings 81,620
CROSBY, INC.
Balance Sheet as of December 31, 2017
Assets Liabilities and Owners’ Equity
Current assets Current liabilities
Cash $ 27,920 Accounts payable $ 71,720
Accounts receivable 42,630 Notes payable 17,620
Inventory 95,910 Total $ 89,340
Total $ 166,460 Long-term debt $ 170,000
Fixed assets Owners’ equity
Net plant and equipment $ 455,980 Common stock and paid-in surplus $ 140,000
Retained earnings 223,100
Total $ 363,100
Total assets $ 622,440 Total liabilities and owners’ equity $ 622,440
What is the EFN if the firm was operating at only 80 percent of capacity in 2017? Assume that fixed assets are sold so that the company has a 100 percent asset utilization.
Explanation / Answer
Crosby, Inc 2017 Income Statement % to Sales Sales $980,760 100.00% Costs $792,960 80.85% Other Expenses $20,060 2.05% Earnings Before interest and taxes $167,740 Interest paid $14,740 Taxable Income $153,000 Taxes @ 21% $32,130 Net Income $120,870 Dividends $39,250 32.47% 39250/120870 Additions to retained earnings $81,620 Crosby, INC Balance Sheet as of December 31, 2017 % to sales Assets Liabilities and Owner's Equity % to Sales 2.85% Cash $27,920 Accounts Payable $71,720 7.31% 4.35% Accounts Receivable $42,630 Notes Payable $17,620 1.80% 9.78% Inventory $95,910 Current assets $166,460 Current Liabilities $89,340 Fixed Assets Long Term Debt $170,000 46.49% Net Plant and Equipment $455,980 Owners Equity Common Stock and paid in Surplus $140,000 Retained Earnings $223,100 $622,440 $622,440 Crosby, Inc 2018 Projected Income Statement % to Sales Sales $1,176,912 100.00% 980760*120% Costs $951,552 80.85% Other Expenses $24,072 2.05% Earnings Before interest and taxes $201,288 Interest paid $14,740 Taxable Income $186,548 Taxes @ 21% $39,175 Net Income $147,373 Dividends $47,856 32.47% Additions to retained earnings $99,517 Crosby, INC Projected Balance Sheet as of December 31, 2018 Assets % to Sales Cash $33,504 2.85% Accounts Receivable $51,156 4.35% Inventory $115,092 9.78% Current assets $199,752 Fixed Assets Net Plant and Equipment $547,176 46.49% Total Assets $746,928 Accounts Payable $86,064 0.073126963 Notes Payable $21,144 0.017965659 Current Liabilities $107,208 Long Term Debt 170000 Owners Equity Common Stock and paid in Surplus 140000 Retained Earnings 322617 Total Liabilities $739,825 without external financing New Retained Earnings Opening Retained earnings + New additions (223100+99517) The fixed assets would have to be adjusted so there is 100% utilisation Full Capacity Sales = $980760/80% 1225950 Full Capacity Ratio = Fixed Assets/Full Capacity Sales Full Capacity Ratio = 455980/1225950 37.19% The fixed assets required would be Full capacity ratio*Projected sales 37.19%*1176912 $437,741 So EFN would be ($199752+$437741)-$739825 EFN would be - $ 102332