close solutoin list

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. a. Construct the forecasted financial statements assuming that these changes are made. What are the firm’s forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? b. If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In other words, what is the firm’s sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.)

BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

Solutions

Chapter
Section
Chapter 17, Problem 13P
Textbook Problem

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.

  1. a. Construct the forecasted financial statements assuming that these changes are made. What are the firm’s forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings?
  2. b. If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In other words, what is the firm’s sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.)

Expert Solution

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects,...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What does cross-referencing mean in the posting process?

College Accounting (Book Only): A Career Approach

18. What is treasury stock?

Cornerstones of Financial Accounting