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, 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, 2013, is shown here (millions of dollars):

Sales for 2013 were $375 million and net income for the year was $11.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.5 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 2014. Do not round intermediate calculations.

Cash $   3.5 Accounts payable $   9.0 Receivables 26.0 Notes payable 18.0 Inventories 58.0 Line of credit 0 Total current assets $ 87.5 Accruals 8.5 Net fixed assets 35.0 Total current liabilities $ 35.5 Mortgage loan 6.0 Common stock 15.0 Retained earnings 66.0 Total assets $122.5 Total liabilities and equity $122.5

Explanation / Answer

Pro Forma Balance Sheet

                                               December 31, 2005

                                              (Millions of Dollars)

                                            Forecast                                                            Pro Forma

                                                                 Basis %                                                                  after

                                  2013 2014 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

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