1. Financial Forecasting Please refer to the financial statements below to answe
ID: 2739952 • Letter: 1
Question
1. Financial Forecasting
Please refer to the financial statements below to answer the following questions:
a. What was the increase in retained earnings of Dylan’s during 2016?
b. Sales are projected to increase by 15 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year?
c. Assume a constant net profit margin and dividend payout ratio, and further assume all of Dylan’s assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is the external financing need for next year?
Dylan’s
Income Statement
For the Year ended 12/31/2016
Net Sales
$ 17,300,000
Cost of goods sold
10,600,000
Depreciation
3,250,000
Earnings before interest and taxes
$ 3,450,000
Interest expense
6,800,000
Earnings before tax
$ 2,770,000
Income tax expense
940,000
Earnings after tax
$ 1,830,000
Dividends
$ 450,000
Dylan’s
Balance Sheet
As of 12/31/2016
Asset
Liabilities
Cash
$350,000
Accounts payable
$1,920,000
Accounts receivable
940,000
Long-term stock
$3,500,000
Inventory
2,360,000
Stock Holders’ Equity
Total Current Assets
$3,650,000
Common stock
$7,500,000
Net fixed assets
$10,850,000
Retained earnings
$1,580,000
Total assets
$14,500,000
Total assets & Equity
$14,500,000
d. Calculate the ratios below for Dylan’s and compare them to the industry average.
Ratio
Ratios for Dylan’s Enterprises
Industry Average
Better (B) or Worse (W) than industry average
Profit margin
0.125
Collection period
25 days
Asset turnover
1.10
Payables period
35 days
Debt-to-assets
0.30
Gross margin
0.42
2. Budgeting Cash Receipts
Garcia Manufacturing Company’s sales, half of which are for cash and the other half sold on credit, over the past three months were:
August
$360,000
September
320,000
October
280,000
a. Estimate Garcia’s cash receipts in October if the company’s collection period is 30 days.
b. Estimate Garcia’s cash receipts in October if the company’s collection period is 45 days.
c. What would be the October balance of accounts receivable for Garcia Manufacturing if the company’s collection period is 30 days? 45 days?
3. Managing Growth
Selected financial information for Knopfler Engineering is presented below:
Indicator/Year
2010
2011
2012
2013
2014
2015
Sales
477.84
491.62
706.52
792.01
876.52
1,088.46
Net Income
-
43.27
26.31
38.48
44.84
25.76
Total Assets
-
477.06
648.42
644.26
697.16
982.63
Equity
-
346.32
426.01
465.85
432.91
553.27
Dividends
-
-
-
0.80
1.65
2.22
Use the information from Knopfler’s annual financial statements to answer the following questions:
a. Calculate the actual and sustainable growth rate for each year.
b. Do you think Knopfler Engineering is having a problem financing its growth?
c. Is the increase in dividends a good idea for Knopfler?
4. Sources and Uses Statement
a. Use the information below to prepare a statement of sources and uses for Little Feat.
Little Feat
Comparative Balance Sheets
(in thousands)
2016
2015
Change
Cash
76
46
30
Accounts receivable
138
86
52
Inventory
206
166
40
Prepaid expenses
12
15
(3)
Building & equipment
272
246
26
Accumulated Depreciation
(76)
(54)
(22)
Total assets
628
505
123
Accounts payable
90
68
22
Income tax payable
16
18
(2)
Bonds payable
118
115
3
Common stock
200
180
20
PIC in excess
100
46
54
Retained earnings
104
78
26
Total liabilities & equity
628
505
123
Little Feat
Income Statement
For the year ending 12/31/2016
(in thousands)
Sales
416
Cost of goods sold
266
Depreciation expense
22
Other expenses
50
Interest expense
6
Income tax expense
18
362
362
Net Income
54
Other Items: Dividends paid
28
Dylan’s
Income Statement
For the Year ended 12/31/2016
Net Sales
$ 17,300,000
Cost of goods sold
10,600,000
Depreciation
3,250,000
Earnings before interest and taxes
$ 3,450,000
Interest expense
6,800,000
Earnings before tax
$ 2,770,000
Income tax expense
940,000
Earnings after tax
$ 1,830,000
Dividends
$ 450,000
Explanation / Answer
1a
Earnings after tax
1,830,000.00
Dividends
450,000.00
Retanied earnings
1,380,000.00
1b
Profit margin ( constant )
0.1058
Dividend payout ( constant )
0.2459
Expected Sales
19,895,000.00
Net Profit
2,104,500.00
Dividends
517,500.00
Retanied earnings
1,587,000.00
1c
Exteranl Finance
Accounts Payable
0.1110
Long Term stock
0.2023
Expected Sales
19,030,000.00
Accounts Payable
2112000
Long Term stock
3850000
Total
5962000
1d
Ratio
Ratios for Dylan’s Enterprises
Industry Average
Better (B) or Worse (W) than industry average
Profit margin
0.160
0.125
(B)
Collection period
19.5 days
25 days
(W)
Asset turnover
0.84
1.10
(W)
Payables period
53 days
35 days
(W)
Debt-to-assets
0.37
0.30
(W)
Gross margin
0.39
0.42
(W)
Here Profit Margin = Net Profit Before Tax
Sales
Collection Period = Average Trade Reveivables * 360
Sales
Assets Turnover = Total Assets
Sales
Payable Period = Average Trade Payable * 360
Purchases
Purchases= Cost of Goods Sold + Closing Stock – Opening Stock
= 10600000+ 2360000-0
= 12960000
Debt-to-assets = Total Debt
Total Assets
Gross Margin = Gross Profit
Sales
Where Gross profit = sales – cost of goods sold
2. a If 30 days
Collection Period = Average Trade Reveivables * 360
Sales
So receivables = 30/360*140000 = 11,666.67
Opening Trade Receivables ( Credit Sales) = 140000
Cash Receipt = 140000-11666.67= 128,333.33
Cash Sales = 140000
Total Cash Receipt= 268,333.33
b If 45 days
Collection Period = Average Trade Reveivables * 360
Sales
So receivables = 45/360*140000 = 17,500
Opening Trade Receivables ( Credit Sales) = 140000
Cash Receipt = 140000-17500= 122500
Cash Sales = 140000
Total Cash Receipt= 262500
C If 30 days = 11666.67
If 45 days = 17500.00
3)
Years
2010
2011
2012
2013
2014
2015
Net Income
0
43.27
26.31
38.48
44.84
25.76
Equity
0
346.32
426.01
465.85
432.91
553.27
Dividend
0
0
0
0.8
1.65
2.22
DPR
0.02
0.04
0.09
Retention
1.00
1.00
1.00
0.98
0.96
0.91
ROE
0.00
0.12
0.06
0.08
0.10
0.05
SGS %
0.00
12.49
6.18
8.09
9.98
4.25
AG
0
100.00
-64.46
31.63
14.18
-74.07
DPR = Dividend/ Net Income
ROE = Net Income/ Equity
Retention = 1-DPR
SGS = ROE * Retention
AG=
Earnings after tax
1,830,000.00
Dividends
450,000.00
Retanied earnings
1,380,000.00
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