2023 Chapter 18 Question 1 The following is the financial statement of Executive Fruit Company for the year ended December 2014 | Assignments Online

Chapter 18, Question 1- The following is the financial statement of Executive Fruit Company for the year ended December 2014.

INCOME STATEMENT, 2014

(Figures in $ Thousands)

  Revenue

$

3,500

  Cost of goods sold

3,150

  EBIT

$

350

  Interest

70

  Earnings before taxes

$

280

  State and federal tax

112

  Net income

$

168

  Dividends

112

  Additions to retained earnings

$

56

BALANCE SHEET (Year-End, 2014)

(Figures in $ Thousands)

  Assets

     Net working capital

$

350

     Fixed assets

1,400

     Total assets

$

1,750

  Liabilities and shareholders’ equity

     Long-term debt

$

700

     Shareholders’ equity

1,050

     Total liabilities and shareholders’ equity

$

1,750

The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.

First stage pro forma statements:

PRO FORMA INCOME STATEMENT, 2015

(Figures in $ Thousands)

  Revenue

$

3,850

  Cost of goods sold

3,465

  EBIT

$

385

  Interest

70

  Earnings before taxes

$

315

  State and federal tax

126

  Net income

$

189

  Dividends

126

  Additions to retained earnings

$

63

PRO FORMA BALANCE SHEET (Year-End, 2015)

(Figures in $ Thousands)

  Assets

     Net working capital

$

385

     Fixed assets

1,540

     Total assets

$

1,925

  Liabilities and shareholders’ equity

     Long-term debt

$

700

     Shareholders’ equity

1,113

     Total liabilities and shareholders’ equity

$

1,813

        Required external financing

$

112

Second stage pro forma balance sheet:

PRO FORMA BALANCE SHEET (Year-End, 2015)

(Figures in $ Thousands)

  Assets

     Net working capital

$

385

     Fixed assets

1,540

     Total assets

$

1,925

  Liabilities and shareholders’ equity

     Long-term debt

$

812

     Shareholders’ equity

1,113

     Total liabilities and shareholders’ equity

$

1,925

How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)

Dividends fall by $ [removed]. Therefore, the requirement for external financing falls from $ [removed]to $ [removed]. On the other hand, shareholders’ equity will be increased by $ [removed].

The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):

  Long-term debt

$ [removed] 

  Shareholders’ equity

[removed] 

  Total

$ [removed] 

Chapter 18, Question 2- Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.60; profit margin = 6%; payout ratio = 30%; equity/assets = .50. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

  Sustainable growth rate

[removed]%  

  Internal growth rate

[removed]%  

Chapter 18, Question 3- Executive Fruit’s financial manager believes that sales in 2015 could rise by as much as 20% or by as little as 5%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs.

a.

Recalculate the first-stage pro forma financial statements under these two growth assumptions and calculate the required external financing (All figures are in thousands). (Enter your answers in thousands.)

Base Case

     20% Growth

     5% Growth

INCOME STATEMENT

  Revenue

$

3,000

$ [removed] 

$ [removed] 

  Cost of goods sold

2,700

[removed] 

[removed] 

  EBIT

$

300

$ [removed] 

$ [removed] 

  Interest

60

[removed] 

[removed] 

  Earnings before taxes

$

240

$ [removed] 

$ [removed] 

  State and federal tax

96

[removed] 

[removed] 

  Net income

$

144

$ [removed] 

$ [removed] 

  Dividends

96

[removed] 

[removed] 

  Retained earnings

$

48

$ [removed] 

$ [removed] 

BALANCE SHEET

  Assets

     Net working capital

$

300

$ [removed] 

$ [removed] 

     Fixed assets

1,200

[removed] 

[removed] 

     Total assets

$

1,500

$ [removed] 

$ [removed] 

  Liabilities and shareholders’ equity

     Long-term debt

$

600

$ [removed] 

$ [removed] 

     Shareholders’ equity

900

[removed] 

[removed] 

     Total liabilities and shareholders’ equity

$

1,500

$ [removed] 

$ [removed] 

  Required external financing

$ [removed] 

$ [removed] 

b.

Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet. (Enter your answers in thousands.)

BALANCE SHEET

Base Case

20% Growth    

5% Growth    

  Assets

     Net working capital

$

300

$ [removed] 

$ [removed] 

     Fixed assets

1,200

[removed] 

[removed] 

     Total assets

$

1,500

$ [removed] 

$ [removed] 

  Liabilities and shareholders’ equity

     Long-term debt

$

600

$ [removed] 

$ [removed] 

     Shareholders’ equity

900

[removed] 

[removed] 

     Total liabilities and shareholders’ equity

$

1,500

$ [removed] 

$ [removed] 

Chapter 18, Question 2- Plank’s Plants had net income of $16,000 on sales of $60,000 last year. The firm paid a dividend of $1,600. Total assets were $900,000, of which $450,000 was financed by debt.

a.

What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

  Sustainable growth rate

[removed]%  

b.

If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.)

  New debt

$ [removed]  

c.

What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

  Maximum growth rate

[removed]%  

Chapter 18, Question 5- An all-equity-financed firm plans to grow at an annual rate of at least 12%. Its return on equity is 20%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

  Maximum dividend payout ratio

[removed]%  

Chapter 18, Question 6- The 2015 financial statements for Growth Industries are presented below:

INCOME STATEMENT, 2015

  Sales

$

280,000   

  Costs

190,000   

  EBIT

$

90,000   

  Interest expense

18,000   

  Taxable income

$

72,000   

  Taxes (at 35%)

25,200   

  Net income

$

46,800   

    Dividends

$ 23,400   

    Addition to retained earnings

23,400   

BALANCE SHEET, YEAR-END, 2015

Assets

Liabilities

  Current assets

  Current liabilities

    Cash

$

4,000   

    Accounts payable

$

11,000   

    Accounts receivable

9,000   

    Total current liabilities

$

11,000   

    Inventories

37,000   

  Long-term debt

180,000   

      Total current assets

$

50,000   

  Stockholders’ equity

  Net plant and equipment

220,000   

    Common stock plus additional paid-in capital

15,000   

    Retained earnings

64,000   

  Total assets

$

270,000   

  Total liabilities and stockholders’ equity

$

270,000   

Sales and costs in 2016 are projected to be 40% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 70% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .50.

What is the required external financing over the next year?

Even if sales increase by 40%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $[removed]. The increase in net working capital will be $[removed], which is less than the increase in the retained earnings. Thus required external financing is $[removed]. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm’s excess production capacity.