1. Financial Forecasting Please refer to the financial statements below to answe
ID: 2740164 • 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
500,000
Earnings before tax
$ 2,950,000
Income tax expense (30%)
885,000
Earnings after tax
$ 2,065,000
Dividends (30% of earnings after tax)
$ 619,500
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
$3,500,000
Net fixed assets
$10,850,000
Retained earnings
$5,580,000
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
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
500,000
Earnings before tax
$ 2,950,000
Income tax expense (30%)
885,000
Earnings after tax
$ 2,065,000
Dividends (30% of earnings after tax)
$ 619,500
Explanation / Answer
Dylan’s Income Statement For the Year ended 12/31/2016 2016 2017 , 15% increase 2017 , 10% increase Amount $ Amount $ Net Sales 1,73,00,000 19895000 19030000 Cost of goods sold 10,600,000 12190000 11660000 Depreciation 3,250,000 3737500 3575000 Earnings before interest and taxes 3,450,000 3967500 3795000 Interest expense 500,000 575000 550000 Earnings before tax 2,950,000 3392500 3245000 Income tax expense (30%) 885,000 1017750 973500 Earnings after tax 2,065,000 2374750 2271500 Dividends (30% of earnings after tax) 619,500 712425 681450 Retained Earnings 1445500 1662325 1590050 Retention Ratio 0% Dylan’s Balance Sheet As of 12/31/2016 Asset Liabilities 2016 2017 2016 2017 Cash 350,000 385000 Accounts payable 1,920,000 2112000 Accounts receivable 940,000 1034000 Long-term stock 3,500,000 3500000 Inventory 2,360,000 2596000 Stock Holders’ Equity Total Current Assets 3,650,000 4015000 Common stock 3,500,000 3500000 Net fixed assets 1,08,50,000 1,19,35,000 Retained earnings 5,580,000 5580000 1590050 Total assets 1,45,00,000 1,59,50,000 Total assets & Equity 1,45,00,000 16282050 a. The increase in retained earnings of Dylan’s during 2016 1445500 b. the projected addition to retained earnings for next year 1662325 c. Following the condition stated in the problem, Liabilities and equity become more than total assets, so there is no requirement of external financing. d Ratio Ratios for Dylan’s Enterprises Industry Average Better (B) or Worse (W) than industry average Profit margin 0.119 0.125 Worse Collection period 18 days 25 days Better Asset turnover 1.2 1.1 Better Payables period 6 days 35 days Worse Debt-to-assets 0.4 0.3 Worse
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