Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937



Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem

EXCESS CAPACITY Krogh Lumber’s 2016 financial statements are shown here.

Krogh Lumber Balance Sheet as of December 31, 2016 (Thousands of Dollars)

Chapter 16, Problem 14P, EXCESS CAPACITY Krogh Lumbers 2016 financial statements are shown here. Krogh Lumber Balance Sheet

Krogh Lumben Income Statement for December 31, 2016 (Thousands of Dollars)

Sales $36,000
Operating costs including depredation 30,783
Earnings before interest and taxes $ 5,217
Interest 1,017
Earnings before taxes $ 4,200
Taxes (40%) 1,680
Net income $ 2,520
Dividends (60%) $ 1,512
Addition to retained earnings $ 1,008
  1. a. Assume that the company was operating at full capacity in 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 75% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets?
  2. b. Now suppose 2017 sales increase by 25% over 2016 sales. Assume that Krogh cannot 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 2017 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 long­term 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 16.2. What are the balances of notes payable, bonds, common stock, and retained earnings?


Summary Introduction

To calculate: Percent increase in sales when fixed assets are operated at 100% capacity,


Additional Fund Needed:

Additional fund needed is also known as external financing needed. It is the state in which a company needed finance to increase its operation. Additional fund needed is a method in which a company raises the funds through external resources to increase its assets, which would increase the sales revenue of the company.

But according to additional fund needed method a company do not change its financial ratio and the liabilities and retained earnings spontaneously increase with the increase in sales and assets.

Financial Statements:

Financial statements are the statements, which tells about the financial activities of a company. Financial statements of a company include its income statement, balance sheet, and cash flows statement.

Income Statement:

Income statement is a business’s financial statement, which tells the financial performance of a company in an accounting period. It shows the income generated by a company and expenses incurred by a company through its operations.

Balance Sheet:

Balance sheet is the summarize statement of total assets and total liabilities of a company in an accounting period. It is one of the financial statements.


Calculation of % increase in sales,


Sales for year 2016 at 75% capacity are $36,000.

Sales for year 2016 at 100% capacity are $48,000 (working notes).

Formula to calculate % increase in sales,


Substitute $48,000 for sales at 100% capacity and $36,000 for sales at 75% capacity


Summary Introduction

To prepare: The forecasted financial statements for the year 2017 and to calculate the firm’s forecasted notes payable and long-term debts balance and forecasted addition to retained earnings.

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