Problem 9-7 Forecasted Statements and Ratios Upton Computers makes bulk purchase
ID: 2617713 • Letter: P
Question
Problem 9-7
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 $300 million and net income for the year was $9 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.6 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 $80 million, or 26.67%, 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.
....... %
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
Soln : Using the AFN equn , i.e. Additional Funds Needed:
AFN = (A-L) *change in sales/Sales - S *Profit Margin *(1-payout ratio)
A = current level of assets = 122.5 and L = current level of liabilities = 41.5
S = New sales = 380
AFN = (122.5-41.5) *80/300 - 380*3% *60% = 14.76
Considering if, the external financing nit needed means the retained earnings should cover the AFN = 14.76, hence the amount of total profit should be = (6.84+14.76)/0.6 = 36million
It should be 3% of sales i.e sales = 36/0.03 = 1200 million, so that means a 400% increase in sales is required to keep away from external financing.
Upton's projected external capital requirements = $14.76 million
(b) As per the table, where we have taken the ratios in same line with the sales and calculated :
We can see that Mortgage loan increased to 22.36 from 6, external financing needed = 22.36-6 = 16.36 million
Upton Computers Pro Forma Balance Sheet December 31, 2016 (Millions of Dollars) Cash 10.34 Receivables 32,93 Inventories 73.47 Total current assets 116.74 Net fixed assets 38.43 Total assets 155.17 Accounts payable 11.4 Notes payable 22.8 Accruals 10.77 Total current liabilities 44.97 Mortgage loan 22..36 Common stock 15 Retained earnings 72.84 Total liabilities and equity 155.17Related Questions
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