ADDITIONAL FUNDS NEEDED Morrissey Technologies Inc.’s 2015 financial statements are shown here.
Morrissey Technologies Inc.: Balance Sheet as of December 31, 2015
Cash | $ 180,000 | Accounts payable | $ 360,000 |
Receivables | 360,000 | Accrued liabilities | 180,000 |
Inventories | 720,000 | Notes payable | 56,000 |
Total current assets | $1,260,000 | Total current liabilities | $ 596,000 |
Long-term debt | 100,000 | ||
Fixed assets | 1,440,000 | Common stock | 1,800,000 |
Retained earnings | 204,000 | ||
Total assets | $2,700,000 | Total liabilities and equity | $2,700,000 |
Morrissey Technologies Inc.: Income Statement for December 31, 2015
Sales | $3,600,000 |
Operating costs including depreciation | 3,279,720 |
EBIT | $ 320,280 |
Interest | 20,280 |
EBT | $ 300,000 |
Taxes (40%) | 120,000 |
Net Income | $ 180,000 |
Per Share Data: | |
Common stock price | $45.00 |
Earnings per share (EPS) | $ 1.80 |
Dividends per share (DPS) | $ 1.08 |
Suppose that in 2016, sales increase by 10% over 2015 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2015 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 87 5% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2016 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12 5%. Assume that any common stock issuances or repurchases can be made at the firm’s current stock price of $45.
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