Upton Computers makes bulk purchases of small computers, stocks them in convenie

Question

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Upton’s balance sheet as of December 31, 2013 is shown here (in millions of dollars):
Cash $ 3.5 Accounts Payable $ 9.0 Accounts Receivable 26.0 Notes Payable 18.0 Inventories 58.0 Accruals 8.5 Total Current Assets $ 87.5 Total Current Liabilities $ 35.5
Net Fixed Assets 35.0 Mortgage Loan 6.0 Common Stock 15.0 . Retained Earnings 66.0 Total Assets $ 122.5 Total Liabs & Equity $122.5
Sales for 2013 were $350 million, while net income for the year was $10.5 million. Upton paid dividends of $4.2 million to common stockholders. The firm is operating at full capacity. During 2014: a. Sales are projected to increase by $70 million. b. They have an average tax rate of 35%. c. Average Days Sales Outstanding is projected at 30 days. d. Gross Margin (Sales - COGS) will average 35%, while inventory turns will improve to 5 times. e. The current Mortgage Loan will be reduced by $2 million. f. All other ratios, including the dividend payout ratio, will remain constant. Construct a projected Balance Sheet and Income Statement for the year-ended 12/31/2014.

Explanation / Answer

Assumption: 360 days in a year

1. Sales for 2014 = 350+70 = $420 Million

Gross Margin(35%) = $147 Million

COGS = 420 - 147 = $273 Million

2. Accounts Receivables at year end = 420*30/360 = $35 Million

3. Inventory Turnover ratio = Sales/ Inventory

                    5 = 420 / Inventory

    Inventory = $84 Million

4. Mortgage Loan = 6 - 2 = $4 Million

5.  net income to Sales ratio in 2013 = 10.5/350 = 0.03

6. FIxed Assets to Sales in 2013 = 35/350 = 0.10

Projected Income Statement

Projected Balance Sheet

Particulars $ Revenue 420 Less: COGS 273 Gross Profit 147 Less: Expenses 134.4 Net Income (0.03 of 420) 12.6 Less: Tax 4.41 Net income after tax 8.19 Less: Dividend paid 4.2 Net income retained 3.99

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