products have become increasing popular over time so the firm is considering bor

Question

products have become increasing popular over time so the firm is considering borrowing money to expand capacity. Your assignment is to put together a simple pro forma financial statement to evaluate borrowing needs and to provide information about the financial feasibility of this expansion. Write a one-page memo providing your conclusions. Attach a printout of your Excel worksheets). Financial Facts for 2018-Before the Expansion Annual Revenue = $20 million COGS-60% of revenue Fixed Expenses $4 million Assets $20 million; all financed through equity Corporate Tax Rate-25% All earnings paid as dividends The Expansion in 2019 At the start of 2019, the firm borrows $10 million to buy a new factory. Assume that the factory is available for production right away. The loan charges 8% simple interest. Revenue for 2019 jumps to $30 million and will increase by 15% in each subsequent year. COGS stay at the same percentage. Fixed costs increase to $4.5m and remain at that level. Part of the loan will be paid off each year from retained earnings. For the purposes of this exercise, treat the interest payments as being determined by the end-of- year liäbilities and earnings in the current year apply towards end-of-year liabilities. Question 1: If equity investors want a dividend of 80% of earnings, how long will it take for the loan to be paid off? Question 2: If we want the loan paid off by 2022, what is the highest payout rate we can have? Things to think about (but don't include in vour memol

Explanation / Answer

In the above table you see that if we maintain payout ratio of 80% loan will be paid off in 2024.

Answer 2 :-

Profoma Basic Information Equity 20,000,000 Growth in Revenue after refinancing 15% Borowings 10,000,000 Rate of Interest on Borrowings 8% Corporate Tax Rate 25% Current Scenario Expansion in 2019 2018 2019 2020 2021 2022 2023 2024 Annual Revenue            20,000,000 30,000,000 34,500,000    39,675,000    45,626,250    52,470,188    60,340,716 COGS 60%            12,000,000 18,000,000 20,700,000    23,805,000    27,375,750    31,482,113    36,204,429 Fixed Expenses              4,000,000     4,500,000     4,500,000      4,500,000      4,500,000      4,500,000      4,500,000 Earnings before Interest and Taxes              4,000,000    7,500,000    9,300,000 11,370,000 13,750,500 16,488,075 19,636,286 Interest payment on ending borrowings        800,000        719,600         616,635         487,595         328,440         134,524 Earnings before tax              4,000,000    6,700,000    8,580,400 10,753,365 13,262,905 16,159,635 19,501,762 Taxes 25%              1,000,000     1,675,000     2,145,100      2,688,341      3,315,726      4,039,909      4,875,440 Earnings after tax              3,000,000    5,025,000    6,435,300     8,065,024     9,947,179 12,119,726 14,626,321 Earnings to be paid as dividend from 2019 80%              3,000,000     4,020,000     5,148,240      6,452,019      7,957,743      9,695,781    11,701,057 Remaining earnings to be utilised for payment of borrowings                            -      1,005,000    1,287,060     1,613,005     1,989,436     2,423,945     2,925,264 Closing Balance of Borrowings on which interest will be paid                            -       8,995,000     7,707,940      6,094,935      4,105,500      1,681,554    (1,243,710)

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