Upton Computers Makes Bulk Purchases

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Carter Corporation's sales are expected to increase from $5 million in 2002 to $6 million in 2003, or by 20 percent. Its assets totaled $3 million at the end of 2002. Carter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2002, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5 percent, and the forecasted payout ratio is 70 percent. Use this information to answer Problems 11-1, 11-2, and 11-3.

11-1 Use the AFN formula to forecast Carter's additional funds needed for the coming year. AFN FORMULA

11-2 What would the additional funds needed be if the company's year-end 2002 assets had been AFN FORMULA $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 11-1? Is the company's "capital intensity" the same or different?

11-3 Return to the assumption that the company had $3 million in assets at the end of 2002, but now AFN FORMULA 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 11-1?

11-4 Pierce Furnishings generated $2.0 million in sales during 2002, and its year-end total assets SA.LES INCREA.SE were $1.5 million. Also, at year-end 2002, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accruals. Looking ahead to 2003, the company estimates that its assets must increase by 75 cents for every $1 increase in sales. Pierce's profit margin is 5 percent, and its payout ratio is 60 percent. How large a sales increase can the company achieve without having to raise funds externally?

11-5

PRO FORMA STATEMENTS AND RATIOS

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Upton's balance sheet as of December 31, 2002, is shown here (millions of dollars):

Cash

Receivables Inventories

Total current assets Net fixed assets

Total assets

Accounts payable $ 9.0

Notes payable 18.0

Accruals 8.5

Total current liabilities $ 35.5

Mortgage loan 6.0

Common stock 15.0

Retained earnings 66.0

Total liabilities and equity $122.5

Sales for 2002 were $350 million, while net income for the year was $10.5 million. Upton paid dividends of $4.2 million to common stockholders. The firm is operating at full capacity.

Assume that all ratios remain constant.

a. If sales are projected to increase by $70 million, or 20 percent, during 2003, use the AFN equation to determine Upton's projected external capital requirements.

b. Construct Upton's pro forma balance sheet for December 31, 2003. Assume that all external capital requirements are met by bank loans and are reflected in notes payable. Assume Upton's profit margin and dividend payout ratio remain constant.

11-6 Stevens Textile's 2002 financial statements are shown below.

ADDITIONAL FUNDS NEEDED

Stevens Textile:

Balance Sheet as of December 31, 2002

(Thousands of Dollars)

Cash $ 1,080 Accounts payable $4,320

Receivables 6,480 Accruals 2,880

Inventories 9,000 Notes payable 2,100

Total current assets $16,560 Total current liabilities $ 9,300

Net fixed assets 12,600 Mortgage bonds 3,500

Common stock 3,500

Retained earnings 12,860

Total assets $29,160 Total liabilities and equity $29,160

Stevens Textile:

Income Statement for December 31, 2002 (Thousands of Dollars)

Sales $36,000

Operating costs 32,440

Earnings before interest and taxes $ 3,560

Interest 460

Earnings before taxes $ 3,100

Net income $1,860

Addition to retained earnings $ 1,023

a. Suppose 2003 sales are projected to increase by 15 percent over 2002 sales. Determine the additional funds needed. Assume that the company was operating at full capacity in 2002, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Use the percent of sales method to develop a pro forma balance sheet and income statement for December 31, 2003. Use an interest rate of 10 percent on the balance of debt at the beginning of the year to compute interest (cash pays no interest). Use the pro forma income statement to determine the addition to retained earnings.

11-7 Garlington Technologies Inc.'s 2002 financial statements are shown below.

ADDITIONAL FUNDS NEEDED

Garlington Technologies Inc.: Balance Sheet as of December 31, 2002

Cash

Receivables Inventories

Total current assets Fixed assets

Total assets

180,000 360,000 720,000 $1,260,000 1,440,000

$2,700,000

Accounts payable $ 360,000

Notes payable 156,000

Accruals 180,000

Total current liabilities $ 696,000

Common stock 1,800,000

Retained earnings 204,000

Total liabilities and equity $2,700,000

Garlington Technologies Inc.: Income Statement for December 31, 2002

Sales

Operating costs

EBIT Interest EBT Taxes (40%) Net income

Dividends

$3,600,000 3,279,720 $ 320,280 18,280 $ 302,000 120,800 $ 181,200

a. Suppose that in 2003 sales increase by 10 percent over 2002 sales and that 2003 dividends will increase to $112,000. Construct the pro forma financial statements using the percent of sales method. Assume the firm operated at full capacity in 2002. Use an interest rate of 13 percent on the debt balance at the beginning of the year. Assume dividends will grow by 3 percent and that the AFN will be in the form of notes payable.

11-8 At year-end 2002, total assets for Bertin Inc. were $1.2 million and accounts payable were LONG-TERM FINANCING $375,000. Sales, which in 2002 were $2.5 million, are expected to increase by 25 percent in NEEDED 2003. Total assets and accounts payable are proportional to sales and that relationship will be maintained. Bertin typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2002, and retained earnings were $295,000. Bertin plans to sell new common stock in the amount of $75,000. The firm's profit margin on sales is 6 percent; 40 percent of earnings will be paid out as dividends.

a. What was Bertin's total debt in 2002?

b. How much new, long-term debt financing will be needed in 2003? (Hint: AFN — New stock = New long-term debt.) Do not consider any financing feedback effects.

11-9 The Booth Company's sales are forecasted to increase from $1,000 in 2002 to $2,000 in 2003. ADDITIONAL FUNDS NEEDED Here is the December 31, 2002, balance sheet:

Cash

$ 100

Accounts payable

$ 50

Accounts receivable

200

Notes payable

150

Inventories

200

Accruals

50

Net fixed assets

500

Long-term debt

400

Common stock

100

Retained earnings

250

Total assets

$1,000

Total liabilities and equity

$1,000

Booth's fixed assets were used to only 50 percent of capacity during 2002, but its current assets were at their proper levels. All assets except fixed assets increase at the same rate as sales, and fixed assets would also increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 5 percent, and its payout ratio will be 60 percent. What is Booth's additional funds needed (AFN) for the coming year?

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