Cold Duck Manufacturing Inc. has the following end-of-year balance sheet:
Cold Duck Manufacturing Inc.
Balance Sheet
For the Year Ended on December 31
Assets | Liabilities | ||
Current Assets: | Current Liabilities: | ||
Cash and equivalents | $150,000 | Accounts payable | $250,000 |
Accounts receivable | 400,000 | Accrued liabilities | 150,000 |
Inventories | 350,000 | Notes payable | 100,000 |
Total Current Assets | $900,000 | Total Current Liabilities | $500,000 |
Net Fixed Assets: | Long-Term Bonds | 1,000,000 | |
Net plant and equipment(cost minus depreciation) | $2,100,000 | Total Debt | $1,500,000 |
Common Equity | |||
Common stock | 800,000 | ||
Retained earnings | 700,000 | ||
Total Common Equity | $1,500,000 | ||
Total Assets | $3,000,000 | Total Liabilities and Equity | $3,000,000 |
The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Cold Duck Manufacturing Inc. generated $350,000 net income on sales of $14,500,000. The firm expects sales to increase by 19% this coming year and also expects to maintain its long-run dividend payout ratio of 30%.
Suppose Cold Duck Manufacturing Inc.’s assets are fully utilized. Use the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support Cold Duck Manufacturing Inc.’s expected sales.
$570,000
$513,000
$456,000
$655,500
When a firm grows, some liabilities grow spontaneously along with sales. Spontaneous liabilities are a source of capital that the firm will generate internally, so they reduce the need for external capital. How much of the total increase in assets will be supplied by spontaneous liabilities for Cold Duck Manufacturing Inc. this year?
$68,400
$87,400
$76,000
$60,800
In addition, Cold Duck Manufacturing Inc. is expected to generate net income this year. The firm will pay out some of its earnings as dividends but will retain the rest for future asset investment. Again, the more a firm generates internally from its operations, the less it will have to raise externally from the capital markets. Assume that the firm’s profit margin and dividend payout ratio are expected to remain constant.
Given the preceding information, Cold Duck Manufacturing Inc. is expected to generate ??????
from operations that will be added to retained earnings.
According to the AFN equation and projections for Cold Duck Manufacturing Inc., the firm’s AFN is ??????
.
Calculation of total assets necessary to support expected sales | |||||||
Assets would also increase by the percentage increase in sales | |||||||
Increase in assets | Total assets*Growth rate | ||||||
Increase in assets | 3000000*19% | ||||||
Increase in assets | $570,000 | ||||||
The spontaneous liabilities include accounts payable and accrued liabilities which increases with sales | |||||||
Increase in spontaneous liabilities | (250000+150000)*19% | ||||||
Increase in spontaneous liabilities | $76,000 | ||||||
The total increase in assets will be supplied by spontaneous liabilities to the amount of $76,000. | |||||||
Calculation of income generated from operations which would be added to retained earnings | |||||||
Profit margin ratio | 2.41% | (350000/14500000) | |||||
Sales for coming period | $17,255,000 | (14500000*1.19) | |||||
Profit margin | $416,500 | (17255000*2.41%) | |||||
Less: Dividend paid | $124,950 | 416500*30% | |||||
Addition to Retained earnings | $291,550 | ||||||
Calculation of additional fund needed | |||||||
Additional fund needed | Increase in assets - Increase in liabilities - Addition to retained earnings | ||||||
Additional fund needed | 570000-76000-291550 | ||||||
Additional fund needed | $202,450 | ||||||
Cold Duck Manufacturing Inc. has the following end-of-year balance sheet: Cold Duck Manufacturing Inc. Balance Sheet...
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