Question

Problem 4-33

Clyde’s Well Servicing has the following financial statements. The balance sheet items, profit margin, and dividend payout have maintained the same relationships the past couple of years; these relationships are anticipated to hold in the future. Clyde’s has excess capacity, so there is no expected increase in capital assets.

Income Statement
Sales	$2,000,000
Cost of goods sold	1,260,000
Gross profit	740,000
Selling and administrative expense	400,000
Amortization	55,000
Earnings before interest and taxes	285,000
Interest	50,000
Earnings before taxes	235,000
Taxes	61,000
Earnings available to common shareholders	$174,000
Dividends paid	$104,000

   

Balance Sheet
Assets		Liabilities and Shareholders' Equity
Cash	$30,000	Accounts payable	$105,000
Accounts receivable	260,000	Accruals	20,000
Inventory	210,000	Bank loan	150,000
Current assets	500,000	Current liabilities	275,000
Capital assets	550,000	Long-term debt	200,000
		Common stock	175,000
		Retained earnings	400,000
Total assets	$1,050,000	Total liabilities and equity	$1,050,000

a.  Using a percent-of-sales method, determine whether Clyde’s can handle a 30 percent sales increase without using external financing. If so, what is the need?         

    

The firm  (Click to select)  needs  has  $  in  (Click to select)  external funds  surplus funds  .

b. If the average collection period of receivables could be held to 43 days, what would the need be for external financing? All other relationships remain the same.    

          

New funds required

$

Suppose the following results with the increased sales of $600,000. The first $75,000 of any new funds would be short-term debt and then long-term debt.      

      

Income Statement
Cash increases by		$5,000
Average collection period		43	days
Inventory turnover (COGS)		6	X
Capital assets increase by		$125,000
Accounts payable increase	in proportion to sales
Accruals	No change
Long-term debt decreases by		$25,000
Gross profit margin		40	%
Selling, general, and administrative expense increase by		$50,000
Amortization increases by		$12,500
Interest decreases by		$10,000
Tax rate		35	%
Dividends increase to		$120,000

c-1. What new funds would be required? (Enter your answers in thousands, rounded to 2 decimal places.)   

   

New funds required

$

c-2. Prepare the pro forma balance sheet. (Input all answers in thousands. Be sure to list the assets and liabilities in order of their liquidity. Round the final answer to 1 decimal place. )

    

Balance Sheet ($ thousands)
Assets		Liabilities and Equity
(Click to select)  Accounts receivable  Capital asset  Prepaid expenses  Inventory  Cash	$	(Click to select)  Capital assets  Retained earnings  Common stock  Cash  Accounts payable  Accounts receivable	$
(Click to select)  Accounts receivable  Capital asset  Inventory  Prepaid expenses  Cash		(Click to select)  Accruals  Retained earnings  Accounts payable  Common stock  Accounts receivable
(Click to select)  Gross plant  Accounts receivable  Prepaid expenses  Cash  Inventory		(Click to select)  Bank loan  Retained earnings  Accounts payable  Common stock  Accounts receivable
Current assets		Current liabilities
(Click to select)  Inventory  Current assets  Capital assets  Accounts receivable  Cash
		(Click to select)  Long-term debt  Accruals  Accounts payable  Capital assets  Bank loan
		(Click to select)  Common stock  Accruals  Accounts payable  Capital assets  Bank loan
		(Click to select)  Retained earnings  Accruals  Accounts payable  Capital assets  Bank loan
Total assets	$	Total liabilities and shareholders' equity	$

Answer 1

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Part a
Earning after tax	a	$                                                          174,000
Sale	b	$                                                      2,000,000
Profit Margin	a/b	8.70%
Dividend	a	$                                                          104,400
Earning	b	$                                                          174,000
Payout Ratio	a/b	60.00%
Change In sale ($2,000,000*30%)		$                                                          600,000
Current Assets	a	$                                                          500,000
Current Liabilities	b	$                                                          275,000
Sale	c	$                                                      2,000,000
Change in sale	d	$                                                          600,000
Profit on new sale ($2.6m*8.7%)	e	$                                                          226,200
Payout Ratio	f	0.60
a/c*d	1	$                                                          150,000
b/c*d	2	$                                                            82,500
e*(1-f)	3	$                                                            90,480
Excess Funds available	1-2-3	$                                                          (22,980)
Hence no requirement of new funds
Part b
Current average collection period		47.45
($260,000*365)/$2,000,000
New Accounts receivable balance		$                                                          338,000
$2,600,000*47.45/365
With 2.6m sale and ACP 43 Days, AR balance		$                                                          306,301
$2,600,000*43/365
Hence, decrese in fund requirement		$                                                            31,699
$338,000-$306,301
Hence required new funding (Decrease)		$                                                            54,679
$31,699+$22,980
Excess funds available which can be used to pay bank loans, or invest in securities/assets
Part c
Income Statement
Sales	$ 2,600,000
Gross profit 40%	$ 1,040,000
Less: Expenses
Selling and administrative expense	$     450,000
Amortization	$        67,500
Earnings before interest and taxes	$     522,500
Interest	$        40,000
Earnings before taxes	$     482,500
Taxes 35%	$     168,875
Earnings available to common shareholders	$     313,625
Dividends paid	$     120,000
Transfer to Retained earning	$     193,625
Balance Sheet
Assets		Liabilities and Shareholders' Equity
Cash	$        35,000	Accounts payable	$     136,500
Accounts receivable	$     306,300	Accruals	$        20,000
Inventory	$     260,000	Bank loan	$     176,200
Current assets	$     601,300	Current liabilities	$     332,700
Capital assets	$     675,000	Long-term debt	$     175,000
		Common stock	$     175,000
		Retained earnings	$     593,600
Total assets	$ 1,276,300	Total liabilities and equity	$ 1,276,300
Net Fund Required ($1,276,300-$1,250,100)	$        26,200