Green Caterpillar Garden Supplies Inc. has the following end-of-year balance she
ID: 2821166 • Letter: G
Question
Green Caterpillar Garden Supplies Inc. has the following end-of-year balance sheet: Green Caterpillar Garden Supplies Inc. Balance Sheet For the Year Ended on December 31 Liabilities Current Liabilities Assets Current Assets: Cash and equivalents Accounts receivable Inventories 150,000 Accounts payable 400,000 Accrued liabilities 350,000 Notes payable $250,000 150,000 100,000 $500,000 1,000,000 $1,500,000 Total Current Assets $900,000 Total Current Liabilities Net Fixed Assets: Long-Term Bonds Net plant and equipment (cost minus depreciation) $2,100,000 Total Debt Common Equity Common stock 800,000 700,000 $1,500,000 $3,000,000 Retained earnings Total Common Equity Total Liabilities and Equity Total Assets $3,000,000 The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Green Caterpillar Garden Supplies Inc. generated $350,000 net income on sales of $14,500,000. The firm expects sales to increase by 17% this coming year and also expects to maintain its long-run dividend payout ratio of 30%. Suppose Green Caterpillar's assets are fully utilized. Usingthe additional funds needed (AFN) equation, the increase in total assets that is necessary to support Green Caterpillar Garden Supplies Inc.'s expected sales is When a firm grows, some liabilities grow spontaneously along with sales. Spontaneous liabilities are a source of capital that the firm will generate internally, so they reduce the need for external capital. How much of the total increase in assets will be supplied by spontaneous liabilities for Green Caterpillar this year? O $81,600 O $54,400 $64,600 $68,000 Now, Green Caterpillar expects to generate a positive net income next year, and to distribute some of its earnings as dividends. It will retain the remainder of the firm's forecasted net income (as retained earnings) for future asset investment. As the company generates more internal funding, it will have less to raise externally via the capital markets Assuming that, next year, Green Caterpillar's net profit margin and dividend payout ratio will be the same as this year's values, then Green Caterpillar is expected to generate $ financing of additional retained earnings According to the financial forecasts for Green Caterpillar Garden Supplies Inc. and the AFN equation, next year, the firm will need to raise in additional external financingExplanation / Answer
1) AFN = [ (Total Assets / Sales) x Change in Sales ] - [ (Spontaneous liabilities / Sales) x Change in sales ] - [ Profit margin x Expected Sales x (1 - Dividend payout ratio) ]
Expected sales = $14,500,000 x (1 + 17%) = $16,965,000
Change in sales = $16,965,000 - $14,500,000 = $2,465,000
Profit margin = Net Income / Sales = $350,000 / $14,500,000 = 0.02413793103
Spontaneous liabilities = Accounts payable + Accrued liabilities = $250,000 + $150,000 = $400,000
Now, we input these values in the equation -
AFN = [ ($3,000,000 / $14,500,000) x $2,465,000 ] - [ ($400,000 / $14,500,000) x $2,465,000 ] - [ 0.02413793103 x $16,965,000 x (1 - 30%) ]
or, AFN = $510,000 - $68,000 - $286,650 = $155,350
2) If you see the equation above, it is divided into three parts -
Total increase in assets required = (Total Assets / Sales) x Change in Sales
Increase in assets funded by spontaneous liabilities = (Spontaneous liabilities / Sales) x Change in sales
Additional retained earnings generated = Profit margin x Expected Sales x (1 - Dividend payout ratio)
Therefore, increase in assets funded by spontaneous liabilities = $68,000
3) Additional retained earnings generated = $286,650
4) AFN = $155,350
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