Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 12, Problem 7P
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton’s
Sales for 2019 were $350 million, and net income for the year was $10.5 million, so the firm’s profit margin was 3.0%. Upton paid dividends of $4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate was 25%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2020.
- a. If sales are projected to increase by $70 million, or 20%, during 2020, use the AFN equation to determine Upton’s projected external capital requirements.
- b. Using the AFN equation, determine Upton’s self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds?
- c. Use the forecasted financial statement method to
forecast Upton’s balance sheet for December 31, 2020. Assume that all additional external capital is raised as a line of credit at the end of the year. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Assume Upton’s profit margin and dividend payout ratio will be the same in 2020 as they were in 2019. What is the amount of the line of credit reported on the 2020 forecasted balance sheets? (Hint: You don’t need toforecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2020 addition toretained earnings for the balance sheet without actually constructing a full income statement.)
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Diamond Computers, which is owned and operated by Dale Diamond, manufactures and sells different types of computers. The company has reported profits every year since its inception in 2002 and has applied for a bank loan near the end of 2021 to upgrade manufacturing facilities. These upgrades should significantly boost future productivity and profitability.
In preparing the financial statements for the year, the chief accountant, Sandy Walters, mentions to Dale that approximately $80,000 of computer inventory has become obsolete and a write-down of inventory should be recorded in 2021.
Dale understands that the write-down would result in a net loss being reported for company operations in 2021. This could jeopardize the company’s application for the bank loan, which would lead to employee layoffs. Dale is a very kind, older gentleman who cares little for his personal wealth but who is deeply devoted to his employees’ well-being. He truly believes the loan is necessary for the company’s…
Paladin Furnishings generated $2 million in sales during 2019, and its year-end total assets were $1.4 million. Also, at year-end 2019, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2020, the company estimates that its assets must increase by $0.70 for every $1.00 increase in sales. Paladin's profit margin is 5%, and its retention ratio is 35%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.
Barry’s Superstore wishes to prepare financial plans. Use the financial statements on the next page and the other information provided below to prepare the financial plans.
The following financial data are also available:
(1) The firm has estimated that its sales for next year will be $130,000.
(2) The firm expects to pay $30,000 in cash dividends.
(3) The firm wishes to maintain a minimum cash balance of $25,000.
(4) Accounts receivable represent approximately 20% of annual sales.
(5) The firm’s ending inventory represents 60% of Cost of Goods Sold.
(6) A new machine costing $15,000 will be purchased next year.
(7) Accounts payable will increase by 5%.
(8) Unearned Revenue will be earned.
(9) Notes Payable would decrease by $5000.
(10) Short-Term Investments and common stock will remain unchanged.
Requirement:
a. Prepare a pro forma income statement for the year ended December 31, 2021, using the percent-of-sales method. Tax Rate is expected to be 15%.
b. Prepare a pro forma balance…
Chapter 12 Solutions
Financial Management: Theory & Practice
Ch. 12 - Prob. 2QCh. 12 - Prob. 3QCh. 12 - Prob. 4QCh. 12 - What is meant by the term “self-supporting growth...Ch. 12 - Suppose a firm makes the following policy changes...Ch. 12 - Broussard Skateboard’s sales are expected to...Ch. 12 - Berman & Jaccor Corporation’s current sales and...Ch. 12 - Smiley Corporations current sales and partial...Ch. 12 - Maggie’s Muffins Bakery generated $5 million in...Ch. 12 - At year-end 2019, Wallace Landscapings total...
Ch. 12 - The Booth Company’s sales are forecasted to double...Ch. 12 - Upton Computers makes bulk purchases of small...Ch. 12 - Stevens Textile Corporations 2019 financial...Ch. 12 - Hatfield Medical Supplys stock price had been...Ch. 12 - Use the AFN equation to estimate Hatfield’s...Ch. 12 - Prob. 3MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- JW Office Supplies, Inc., is a wholesale distributor of office supplies. It sells pencils and pens, paper goods (including computer paper and forms), staplers, calendars, and other items, excluding furniture and other major items such as copy machines that you would expect to find in an office. Sales have been growing at 5 percent per year during the past several years. Mr. Kay, the president of JW Office Supplies, recently attended a national office supplies convention. In conversations during that convention, he discovered that sales for ABC Office Supplies competitors have been growing at 15 percent per year. Arriving back home, he did a quick investigation and discovered the following: JW Office Supplies customer turnover is significantly higher than the industry average. JW Office Supplies vendor turnover is significantly lower than the industry average. The new market analysis system was supposed to be ready two years ago but has been delayed for more than one year in systems development. A staff position, reporting to the president, for a person to prepare and analyze cash budgets was created two years ago but has never been filled. Mr. Kay has called on you to conduct a systems survey of this situation. You are to assume that a request for systems development has been prepared and approved. The information system at JW Office Supplies is much like that depicted in Chapters 10 through 16. Make and describe all assumptions that you believe are necessary to solve any of the following: a. What are the specific tasks of this systems survey? b. Indicate specific quantifiable benefits and costs that should be examined in assessing the economic feasibility of any solutions that might be proposed. Explain how you would go about quantifying each benefit or cost. c. Propose and explain three different scopes for the systems analysis. Use a context diagram to describe each scope alternative. Hint: What subsystems might be involved in an analysis?arrow_forwardPark and West, LLC, provides consulting services to retail merchandisers in the Midwest. In 2019, they generated $720,000 in service revenue. Their total cost (fixed and variable) per client was $2,500 and they served 115 clients during the year. If operating expenses for the year were $302,000 what was their net income?arrow_forwardHalifax Shoes has 30% of its sales in cash and the remainder on credit. Of the credit sales, 65% is collected in the month of sale, 25% is collected the month after the sale, and 5% is collected the second month after the sale. How much cash will be collected in August if sales are estimated as $75,000 in June, $65,000 in July, and $90,000 in August?arrow_forward
- Forecasted Statements and Ratios Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Uptons balance sheet as of December 31, 2018, is shown here (millions of dollars): Sales for 2018 were 350 million, and net income for the year was 10.5 million, so the firms profit margin was 3.0%. Upton paid dividends of 4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2019. a. If sales are projected to increase by 70 million, or 20%, during 2019, use the AFN equation to determine Uptons projected external capital requirements. b. Using the AFN equation, determine Uptons self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? c. Use the forecasted financial statement method to forecast Uptons balance sheet for December 31, 2019. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Uptons profit margin and dividend payout ratio will be the same in 2019 as they were in 2018. What is the amount of the line of credit reported on the 2019 forecasted balance sheets? (Hint: You dont need to forecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2019 addition to retained earnings for the balance sheet without actually constructing a full income statement.)arrow_forwardBarry’s Superstore wishes to prepare financial plans. Use the financial statements on the next page and the other information provided below to prepare the financial plans. The following financial data are also available: (1) The firm has estimated that its sales for next year will be $130,000. (2) The firm expects to pay $30,000 in cash dividends. (3) The firm wishes to maintain a minimum cash balance of $25,000. (4) Accounts receivable represent approximately 20% of annual sales. (5) The firm’s ending inventory represents 60% of Cost of Goods Sold. (6) A new machine costing $15,000 will be purchased next year. (7) Accounts payable will increase by 5%. (8) Unearned Revenue will be earned. (9) Notes Payable would decrease by $5000. (10) Short-Term Investments and common stock will remain unchanged. Requirement: Prepare a pro forma income statement for the year ended December 31, 2021, using the percent-of-sales method. Tax Rate is expected to be 15%. Prepare a pro forma balance…arrow_forwardSaturn Computer is considering to expand, but before that, the management wants to know the financial position of the company compared to that of the industry. Data for Saturn Computer Co. and its industry averages follow. Items Amount ($) Items Amounts ($) Cash 87,500 Accounts Payable 110,000 Total Operating Expense 123,000 Interest Expense 26,500 Income Tax 18,200 Total Sales 1,607,500 Net Fixed Assets 292,500 Long-term Bank Loan 246,500 Cost of Goods Sold 1,352,500 Common Stock Equity 361,000 Inventories 211,500 Other Current Liabilities 84,000 Accounts Receivables 336,000 Notes Payable (Maturity within 1 year) 107,000 Total Operating Profit 110,000 Net Profit after tax 88,300…arrow_forward
- TUV Hardware Stores is a major retailer of lumber and building products. They are privately owned but professionally managed. Recently, they took out a bank loan to build a new robotic warehouse. Debt to equity is now .2:1, and the bank has asked for financial statements. They have approached your audit firm to provide some assurance based on your excellent reputation. Each retail store is franchised and there are no corporate-owned stores. In 2020, franchise fees are expected to be $176 million while wholesale sales to stores are expected to be $2,416 million and wholesale sales direct to major builders are expected to be $203 million. Gross profit on wholesale sales is around 5%. The franchise fee goes to such things as store support (training, point of sale inventory, pricing systems) and advertising, and a 20% profit. TUV has operations across Canada with major warehouses in Vancouver, Winnipeg, Brampton, and St. John, New Brunswick. The new warehouse will be built in Kitchener.…arrow_forwardPicasso Company is a wholesale distributor of packaging equipment and supplies. The company's sales have averaged about $900,000 annually for the 3-year period 2018–2020. The firm's total assets at the end of 2020 amounted to $850,000. The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company's operations for the past 3 years. This report will be presented to the board of directors at their next meeting. In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2018–2020. 2018 2019 2020 Current ratio 1.80 1.89 1.96 Acid-test (quick) ratio 1.04 0.99 0.87 Accounts receivable turnover 8.75 7.71 6.42 Inventory turnover 4.91 4.32 3.42 Debt to assets…arrow_forwardPetlassa is a company with a large distribution network and selling automobile tires. The company's finance manager will meet with the General Manager to discuss the financial information for the next 3 months. Last month's TL sales amount and sales forecasts for the next 3 months are given below:Last Month Estimations/ForecastsMay 250,000 June 100,000July 150,000August 250,000September 100,000The company collects 40% of its sales in cash and 60% as 1 month term (later). Purchases make up 60% of sales. Petlassa makes the relevant purchase one month before its sales; However, it makes the payment 1 month after the purchase date. Labor expenses are 5% of sales and paid in the relevant month. General administration expenses amount to 15% of the sales and are paid in the relevant month. 10,000 TL income tax will be paid in August. The 50,000 TL dividend payment will be made in June. The cash balance on June 1 is required to be 80,000 TL.All transactions take place at the end of the…arrow_forward
- Maggie's Muffins Bakery generated $4 million in sales during 2019, and its year-end total assets were $2.2 million. Also, at year-end 2019, current liabilities were $1 million, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2020, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 6%, and its payout ratio will be 70%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate? Do not round intermediate calculations. Enter your answer for sales increase in dollars. For example, an answer of $2 million should be entered as 2,000,000.Round the monetary value to the nearest dollar and percentage value to one decimal place. Sales can increase by $ , that is byarrow_forwardA Muffins Bakery generated $2 million in sales during 2019, and its year-end total assets were $1.1 million. Also, at year-end 2019, current liabilities were $1 million, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2020, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 6%, and its payout ratio will be 80%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate? Sales can increase by $ ___?__, that is by _____?___%arrow_forwarda) Sharam Industries has a 120-day operating cycle. If its average age of inventory is 50 days, how long is its average collection period ? If its average payment period is 30 days, what is its cash conversion cycle ? b) Icy Treats, Inc., is a seasonal business that sells frozen desserts. At the peak of its summer selling season the firm has $35,000 in cash, $125,000 in inventory, $70,000 in accounts receivable, and $65,000 in accounts payable. During the slow winter period the firm holds $10,000 in cash, $55,000 in inventory, $40,000 in accounts receivable, and $35,000 in accounts payable. Calculate Icy Treats’ minimum and peak funding requirements.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Pkg Acc Infor Systems MS VISIO CDFinanceISBN:9781133935940Author:Ulric J. GelinasPublisher:CENGAGE LPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Pkg Acc Infor Systems MS VISIO CD
Finance
ISBN:9781133935940
Author:Ulric J. Gelinas
Publisher:CENGAGE L
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
The management of receivables Introduction - ACCA Financial Management (FM); Author: OpenTuition;https://www.youtube.com/watch?v=tLmePnbC3ZQ;License: Standard YouTube License, CC-BY