Problem 1: Broussard Skateboard's sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.
Problem 2: Refer to Problem 1. What would be the additional funds needed if the company's yearend 2013 assets had been $7 million? Assume that all other numbers, including sales, are the same as in Problem 12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 1? Is the company's "capital intensity" ratio the same or different?
Problem 3: Refer to Problem 1. Return to the assumption that the company had $5 million in assets at the end of 2013, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 1?
Problem 4: Maggie's Muffins, Inc., generated $5,000,000 in sales during 2013, and its year-end total assets were $2,500,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2014, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 7%, and its payout ratio will be 80%. How large a sales increase can the company achieve without having to raise funds externally-that is, what is its selfsupporting growth rate?
Problem 5: At year-end 2013, Wallace Landscaping's total assets were $2.17 million and its accounts payable were $560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. 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 2013, and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in 2014 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 2014. (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 Wallace's total long-term debt and total liabilities in 2013?
b. How much new long-term debt financing will be needed in 2014? (Hint: AFN - New stock = New long-term debt.)
Problem 6: The Booth Company's sales are forecasted to double from $1,000 in 2013 to $2,000 in 2014. Here is the December 31, 2013, balance sheet:
|
Cash
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$100
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Accounts Payable
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$50
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Accounts Recievable
|
200
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|
Notes Payable
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150
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Inventories
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200
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|
Accruals
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|
50
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Net Fixed Assets
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500
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Long-Term debt
|
400
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|
|
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Common Stockk
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100
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|
|
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Retained Earning
|
250
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|
1000
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Total Liability and equity
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1000
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Booth's fixed assets were used to only 50% of capacity during 2013, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 5% and its payout ratio to be 60%. What is Booth's additional funds needed (AFN) for the coming year?