Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 9, Problem 9P
a)
Summary Introduction
To determine: Projected financial statement of the company for 2019.
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Topic: Financial Planning & Forecasting
At year-end 2018, total assets for ABC Inc. were $1.8 million and accounts payable were $450,000. Sales, which in 2018 were $3 are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales (grow at the same rate). ABC typically uses no current liabilities other than accounts payable. Common stock amounted to $500,000 in 2018, and retained earnings were $475,000. ABC plans to sell new common stock in the amount of $130,000. The firm's profit margin on sales is 5%; 35% of earnings will be retained.
a. What were ABC's total liabilities in 2018?
b. How much new long-term debt financing will be needed in 2019?
(Hint: AFN - New stock = New long-term debt)
Pro forma balance sheet Peabody & Peabody has 2019 sales of $10 million. It wishes to analyze expected performance and financing needs for 2021, which is 2 years ahead. Given the following information, respond to parts a and b.
(1) The percent of sales for items that vary directly with sales are as follows: Accounts receivable, 12% Inventory, 18% Accounts payable, 14% Net profit margin, 3%
(2) Marketable securities and other current liabilities are expected to remain unchanged.
(3) A minimum cash balance of $480,000 is desired.
(4) A new machine costing $650,000 will be acquired in 2020, and equipment costing $850,000 will be purchased in 2021. Total depreciation in 2020 is forecast as $290,000, and in 2021 $390,000 of depreciation will be taken.
(5) Accruals are expected to rise to $500,000 by the end of 2021.
(6) No sale or retirement of long-term debt is expected.
(7) No sale or repurchase of common stock is expected.
(8) The dividend payout of 50% of net profits is expected to…
Financing Deficit
Garlington Technologies Inc.'s 2019 financial statements are shown below:
Income Statement for December 31, 2019
Sales
$4,000,000
Operating costs
3,200,000
EBIT
$ 800,000
Interest
120,000
Pre-tax earnings
$ 680,000
Taxes (25%)
170,000
Net income
510,000
Dividends
$ 190,000
Balance Sheet as of December 31, 2019
Cash
$ 160,000
Accounts payable
$ 360,000
Receivables
360,000
Line of credit
0
Inventories
720,000
Accruals
200,000
Total CA
$1,240,000
Total CL
$ 560,000
Fixed assets
4,000,000
Long-term bonds
1,000,000
Total Assets
$5,240,000
Common stock
1,100,000
RE
2,580,000
Total L&E
$5,240,000
Suppose that in 2020 sales increase to $4.2 million and that 2020 dividends will increase to $194,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2019. The long-term bonds have an interest rate of 8%. New financing…
Chapter 9 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 9 - Define each of the following terms:
Operating...Ch. 9 - Prob. 2QCh. 9 - Prob. 3QCh. 9 - Prob. 4QCh. 9 - Prob. 5QCh. 9 - Prob. 6QCh. 9 - Broussard Skateboard’s sales are expected to...Ch. 9 - AFN Equation Refer to Problem 9-1. What would be...Ch. 9 - AFN Equation Refer to Problem 9-1. Return to the...Ch. 9 - Sales Increase Maggies Muffins Bakery generated 5...
Ch. 9 - Long-Term Financing Needed At year-end 2018,...Ch. 9 - Additional Funds Needed
The Booth Company’s sales...Ch. 9 - Forecasted Statements and Ratios Upton Computers...Ch. 9 - Financing Deficit
Stevens Textile Corporation’s...Ch. 9 - Prob. 9PCh. 9 - Hatfield Medical Supplys stock price had been...Ch. 9 - Prob. 2MCCh. 9 - Define the term capital intensity. Explain how a...
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- Long-Term Financing Needed At year-end 2018, Wallace Landscapings total assets were 2.17 million, and its accounts payable were 560,000. Sales, which in 2018 were 3.5 million, are expected to increase by 35% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to 625,000 in 2018, and retained earnings were 395,000. Wallace has arranged to sell 195,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends. a. What were Wallaces total long-term debt and total liabilities in 2018? b. How much new long-term debt financing will be needed in 2019? [Hint: AFN New stock = New long-term debt.)arrow_forwardALTERNATIVE DIVIDEND POLICIES In 2018, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2018 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2019, earnings are expected to jump to 14.4 million and the firm expects to have profitable investment opportunities of 8.4 million. It is predicted that Keenan will not be able to maintain the 2019 level of earnings growth because the high 2019 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2019, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenans total dividends for 2019 assuming that it follows each of the following policies: 1. Its 2019 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2018 dividend payout ratio. 3. It uses a pure residual dividend policy (40% of the 8.4 million investment is financed with debt and 60% with common equity). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual dividend policy. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer. c. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2019 and to have the dividend grow at 10% after 2019. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g = Retention rate ROE = (1.0 Payout rate)(ROE)] e. Does a 2019 dividend of 9,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower? Explain your answer.arrow_forwardADDITIONAL FUNDS NEEDED Morrissey Technologies Inc.s 2019 financial statements are shown here. Morrissey Technologies Inc.: Balance Sheet as of December 31, 2019 Morrissey Technologies Inc.: Income Statement for December 31, 2019 Suppose that in 2020, sales increase by 10% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 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 2020 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 firms current stock price of 45. a. Construct the forecasted financial statements assuming that these changes are made. What are the firms forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? b. If the profit margin remains at 6.25% 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 firms sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.)arrow_forward
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