Vincent Buga-ay​

Kyle Kirby Jambonganan

Arcel Jay Lazarito
Jose Gabriel Morales​
BABA 2B

Problem 6-13: Additional Funds Required

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?

Morrissey Technologies Inc.

Forecasted Balance Sheet
December 31, 2016

2015 2016

ASSETS

Cash 180,000 198,000

Accounts Receivable 360,000 396,000

Inventories 720,000 792,000

Total Current Assets 1,260,000 1,386,000

Fixed Assets 1,440,000 1,584,000

Total Assets 2,700,000 2,970,000

LIABILITIES

Accounts Payable 360,000 396,000

Accrued Liabilities 180,000 198,000

Notes Payable 56,000 89,100

Total Current Liabilities 596,000 683,100

Long-Term Debt 100,000 207,900

Total Liabilities 696,000 891,000

Common Stock 1,800,000 1,765,110

Retained Earnings 204,000 313,890

Total Liabilities and Equity 2,700,000 2,970,000

Morrissey Technologies Inc.

Forecasted Income Statement
For the Year Ended December 31, 2016​

2015 2016

Sales 3,600,000 3,960,000

Operating costs including 3,279,720 3,465,000

depreciation

EBIT 320,280 495,000

Interest 20,280 37,125

EBT 300,000 457,875

Taxes (40%) 120,000 183,150

Net Income 180,000 274,725

Dividends 108,000 164,835.00

Addition to Retained Earnings 72,000 109,890.00

Solutions

TOTAL LIABILITIES

Total assets to liabilities ratio = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
 30% = 2,970,000
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Total Liabilities = 2, 970, 000 𝑥 30%

Total Liabilities = 891, 000

INTEREST BEARING DEBTS

Total Liabilities = 891,000

Less: ​ Accounts Payable = (396,000)​

Less: ​ Accrued Liabilities = (198,000)

Interest Bearing Debts = 297,000

NOTES PAYABLE

Notes Payable = 297,000 x 30%

= 89,100​

LONG-TERM DEBT

Long-term Debt = 297,000 x 70%

= 207,900​
​ ​ ​
RETAINED EARNINGS

Addition to Retained Earnings = 2016 Net Income x (1-Dividend Payout Ratio)

= 274,725 x (1-.6)

= 274,725 x .4

= 109,890

New Retained Earnings = 2015 Retained Earnings + Addition to Retained

Earnings

= 204,000 + 109,890
 = 313,890

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.)

SUSTAINABLE GROWTH RATE

AFN = Required Asset Increase - Spontaneous Increase in Payable and

Accruals – Funds Obtained as new R/E based on SY Sales

= [(A0/S0)∆S] - [(L0/S0) ∆S] – [(M)(S1)(1 - Payout Ratio)]

0 = [(2,700,000/3,600,000) ∆S] – [(540,000/3,600,000) ∆S] –

[(0.05)(3,600,000 + ∆S) (40%)]

0 = [(0.75)(∆S)] – [(0.15) ∆S] – [(0.02) (∆S)] - 72,000

0 = (0.58) (∆S) - 72,000

72,000 = (0.58) (∆S)

(0.58) (∆S) = 72,000

∆S = 72,000/0.58

∆S = 124,138

SGR = ∆S / Sales

= 124, 138 / 3,600,000

= 3.45%
 ADDITIONAL COMPUTATIONS

CASH

Forecasted Cash = 2015 Cash x 110%

= 180,000 x 110%​

= 198,000

RECEIVABLES

Forecasted Receivables = 2015 Receivables x 110%

= 360,000 x 110%​

= 396,000

INVENTORIES

Forecasted Inventories = 2015 Inventories x 110%

= 720,000 x 110%​

= 792,000

FIXED ASSETS

Forecasted Fixed Assets = 2015 Fixed Assets x 110%

= 1,440,000 x 110%​

= 1,584,000

ACCOUNTS PAYABLE
 Forecasted Accounts Payable = 2015 Accounts Payable x 110%

= 360,000 x 110%​

= 396,000

ACCRUED LIABILITIES

Forecasted Accrued Liabilities = 2015 Accrued Liabilities x 110%

= 180,000 x 110%​

= 198,000

COMMON STOCK

Total Liabilities and Equity = 2,970,000

Less: Total Liabilities = 891,000

Less: New Retained Earnings = 313,890

Common Stock = 1,765,110

2016 SALES

Forecasted Sales = 2015 Sales x 110%

= 3,600,000 x 110%​

= 3,960,000

2016 OPERATING COSTS

Forecasted Operating Costs = 2016 Sales x 87.50%

= 3,960,000 x 87.50%​

= 3,465,000
 2016 EBIT

Forecasted EBIT = 2016 Sales - 2016 Operating Costs

= 3,960,000 - 3,465,000

= 495,000

2016 INTEREST EXPENSE

Forecasted Interest Expense = 2016 Interest Bearing Debts x 12.50%

= 297,000 x 12.50%

= 37,125

2016 EBT

Forecasted EBT = 2016 EBIT - 2016 Interest Expense

= 495,000 - 37,125

= 457,875

2016 TAXES

Forecasted Taxes = 2016 EBT x 40%

= 457,875 x 40%

= 183,150

2016 NET INCOME

Forecasted Net Income = 2016 EBT - 2016 Taxes

= 457,875 - 183,150

= 274,725
Problem 6-14: Excess Capacity

a.​ Assume that the company was operating at full capacity in 2015 with regard to all items
except fixed assets; fixed assets in 2015 were being utilized to only 75% of capacity. By
what percentage could 2016 sales increase over 2015 sales without the need for an
increase in fixed assets?

FULL CAPACITY SALES

Full Capacity Sales = Sales / Operating Capacity (%)

= 36,000 / 75%

= 48,000

INCREASE IN SALES

Increase in Sales = (Full Capacity Sales - Sales) / Sales

= (48,000 - 36,000) / 36,000

= 0.3333 or 33.33%

b.​ Now suppose 2016 sales increase by 25% over 2015 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 2016 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 long-term 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 6.2. What are the
balances of notes payable, bonds, common stock, and retained earnings?

NOTES PAYABLE

Total Liabilities = Total Assets x Liabilities-to-Assets Ratio

= 53,100 x 0.42

= 22,302

Interest-bearing debt = Total Liabilities - (Accounts Payable +

Accrued Liabilities)

= 22,302 - (9,000 + 3,150)

= 22,302 - 12,150

= 10, 152

Notes Payable = Interest-bearing debt x 35%

= 10,152 x 35%

= 3,553

MORTGAGE BONDS

Mortgage Bonds = Interest-bearing debt - Notes Payable

= 10,152 - 3,553

= 6,599

COMMON STOCK

Common Stock = (Total Liabilities and Equity - Total

Liabilities) - New Retained Earnings
 = (53,100 - 22,203) - 28,284

= 2,514

RETAINED EARNINGS

New Retained Earnings = Current Retained Earnings + Addition to

Retained Earnings

= 26,608 + 1,676

= 28,284

Krogh Lumber
Forecasted Balance Sheet
December 31, 2016

2015 2016

ASSETS

Cash 1,800 2,250

Receivables 10,800 13,500

Inventories 12,600 15,750

Total Current Assets 25,200 31,500

Fixed Assets 21,600 21,600

Total Assets 46,800 53,100

LIABILITIES

Accounts Payable 7,200 9,000

Accrued Liabilities 2,520 3,150

Notes Payable 3,472 3,553

Total Current Liabilities 13,192 15,703

Mortgage Bonds 5,000 6,599

 Total Liabilities 18,192 22,302

EQUITY

Common Stock 2,000 2,514

Retained Earnings 26,608 28,284

Total Liabilities and Equity 46,800 53,100

Krogh Lumber
Forecasted Income Statement
For the Year Ended December 31, 2016​

2015 2016

Sales 36,000 45,000

Operating costs including depreciation 30,783 36,900

Earnings before interest and taxes 5217 8,100

Interest 1017 1,117

Earnings before taxes 4200 6,983

Taxes (40%) 1,680 2,793

Net Income 2,520 4,190

Dividends (60%) 1,512 2,514

Addition to retained earnings 1,008 1,676

 CASH

Forecasted Cash = 2015 Cash x 125%

= 1,800 x 125%​

= 2,250

RECEIVABLES

Forecasted Receivables = 2015 Receivables x 125%

= 10,800 x 125%​

= 13,500

INVENTORIES

Forecasted Inventories = 2015 Inventories x 125%

= 12,600 x 125%​

= 15,750

TOTAL CURRENT ASSETS

Cash = 2,250

Receivables = 13,500

Inventories = 15,750

Total Current Assets = 31,500

 NET FIXED ASSETS

Forecasted Net Fixed Assets = 2015 Net Fixed Assets x 100%

= 21,600 x 100%​

= 21,600 (no change)

TOTAL ASSETS

Total Current Assets = 31,500

Net Fixed Assets = 21,600

Total Assets = 53,100

ACCOUNTS PAYABLE

Forecasted Accounts Payable = 2015 Accounts Payable x 125%

= 7,200 x 125%​

= 9,000

ACCRUED LIABILITIES

Forecasted Accrued Liabilities = 2015 Accrued Liabilities x 125%

= 2,520 x 125%​

= 3,150

2016 SALES

Forecasted Sales = 2015 Sales x 125%

= 36,000 x 125%​

= 45,000

2016 OPERATING COSTS

Forecasted Operating Costs = 2016 Sales x 87.50%

 = 45,000 x 82%​

= 36,900

2016 EBIT

Forecasted EBIT = 2016 Sales - 2016 Operating Costs

= 45,000 - 36,900

= 8,100

2016 INTEREST EXPENSE

Forecasted Interest Expense = 2016 Interest Bearing Debts x 11%

= 10,152 x 11%

= 1,117

2016 EBT

Forecasted EBT = 2016 EBIT - 2016 Interest Expense

= 8,100 - 1,117

= 6,983

2016 TAXES

Forecasted Taxes = 2016 EBT x 40%

= 6,983 x 40%

= 2,793

2016 NET INCOME

Forecasted Net Income = 2016 EBT - 2016 Taxes

= 6,983 - 2,793

= 4,190