17-14 EXCESS CAPACITY Krogh Lumber's 2018 financial statements are shown here. Krogh Lumber: Balance Sheet as of December 31, 2018 (Thousands of Dollars) Cash $ 1,800 Accounts payable $ 7,200 Receivables 10,800 Accrued liabilities 2,520 Inventories 12,600 Notes payable 3,472 Total current assets $25,200 Total current liabilities $13,192 Mortgage bonds 5,000 Net fixed assets 21,600 Common stock 2,000 Retained earnings 26,608 $46,800 Total liabilities and equity Total assets $46,800 Krogh Lumber: Income Statement for December 31, 2018 (Thousands of Dollars) Sales $36,000 Operating costs including depreciation 30,783 Earnings before interest and taxes $ 5,217 Interest 1,017 $ 4,200 Earnings before taxes Taxes (40%) 1,680 Net income $ 2,520 Dividends (60%) $ 1,512 Addition to retained earnings $ 1,008 a. Assume that the company was operating at full capacity in 2018 with regard to all items except fixed assets; fixed assets in 2018 were being utilized to only 75% of capac- ity. By what percentage could 2019 sales increase over 2018 sales without the need for an increase in fixed assets? b. Now suppose 2019 sales increase by 25% over 2018 sales. Assume that Krogh can- not sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 82% and increase its total liabilities-to- assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2019 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements like those shown in Table 17.2. What are the balances of notes payable, bonds, common stock, and retained earnings?
17-14 EXCESS CAPACITY Krogh Lumber's 2018 financial statements are shown here. Krogh Lumber: Balance Sheet as of December 31, 2018 (Thousands of Dollars) Cash $ 1,800 Accounts payable $ 7,200 Receivables 10,800 Accrued liabilities 2,520 Inventories 12,600 Notes payable 3,472 Total current assets $25,200 Total current liabilities $13,192 Mortgage bonds 5,000 Net fixed assets 21,600 Common stock 2,000 Retained earnings 26,608 $46,800 Total liabilities and equity Total assets $46,800 Krogh Lumber: Income Statement for December 31, 2018 (Thousands of Dollars) Sales $36,000 Operating costs including depreciation 30,783 Earnings before interest and taxes $ 5,217 Interest 1,017 $ 4,200 Earnings before taxes Taxes (40%) 1,680 Net income $ 2,520 Dividends (60%) $ 1,512 Addition to retained earnings $ 1,008 a. Assume that the company was operating at full capacity in 2018 with regard to all items except fixed assets; fixed assets in 2018 were being utilized to only 75% of capac- ity. By what percentage could 2019 sales increase over 2018 sales without the need for an increase in fixed assets? b. Now suppose 2019 sales increase by 25% over 2018 sales. Assume that Krogh can- not sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 82% and increase its total liabilities-to- assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2019 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements like those shown in Table 17.2. What are the balances of notes payable, bonds, common stock, and retained earnings?
Survey of Accounting (Accounting I)
8th Edition
ISBN:9781305961883
Author:Carl Warren
Publisher:Carl Warren
Chapter9: Metric-analysis Of Financial Statements
Section: Chapter Questions
Problem 9.2.1P
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