Question

Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2019, is shown here (millions of dollars):

Cash	$   3.5		Accounts payable	$   9.0
Receivables	26.0		Notes payable	18.0
Inventories	58.0		Line of credit	0
Total current assets	$ 87.5		Accruals	8.5
Net fixed assets	35.0		Total current liabilities	$ 35.5
			Mortgage loan	6.0
			Common stock	15.0
			Retained earnings	66.0
Total assets	$122.5		Total liabilities and equity	$122.5

Sales for 2019 were $500 million and net income for the year was $15 million, so the firm's profit margin was 3.0%. Upton paid dividends of $6 million to common stockholders, so its payout ratio was 40%. Its tax rate was 25%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2020. Do not round intermediate calculations.

1. If sales are projected to increase by $120 million, or 24%, during 2020, use the AFN equation to determine Upton's projected external capital requirements. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

   $    million

2. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.

     %

3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2020. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton's profit margin and dividend payout ratio will be the same in 2020 as they were in 2019. What is the amount of the line of credit reported on the 2020 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2020 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.

   Upton Computers Pro Forma Balance Sheet December 31, 2020 (Millions of Dollars)
   Cash	$
   Receivables	$
   Inventories	$
   Total current assets	$
   Net fixed assets	$
   Total assets	$
   Accounts payable	$
   Notes payable	$
   Line of credit	$
   Accruals	$
   Total current liabilities	$
   Mortgage loan	$
   Common stock	$
   Retained earnings	$
   Total liabilities and equity	$

Answer 1

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W ? v 1 05:55 ENG 23-02-2020 13 X Fax AG2106 - 2105 2106 - AA AB AC AD AE AF AG AH AI AJ AK AL AM - 2107 2108 2109 2110 2111 2112 UPTON CURRENT SALES INCREASE IN SALES DIVIDEND PAYOUT PROFIT MARGIN = 500 24% 40% 3% 2113 2114 1 INCREASE IN ASSETS NECESSARY TO SUPPORT INCREASE IN SALES = INCREASE IN SALES X TOTAL ASSETS 122.5 X 24% = 29.4 2 INCREASE IN LIABILITIES NECESSARY TO SUPPORT INCREASE IN SALES = INCREASE IN SALES X SPONTANEOUS LIABILITIES ACCOUNTS PAYABLE + ACCRUED LIABILITIES = 17.5 X 24% = 4.2 2115 2116 2117 2118 2119 2120 2121 2122 2123 2124 2125 3 COMPANY WILL MAINTAIN PROFIT MARGIN & DIVIDEND PAYOUT INCOME THAT WILL BE ADDED TO RETAINED EARNINGS NEW SALES = 500 + 120 = PROFIT = 3 % * 580 = LESS DIVIDEND PAYOUT (40%) = SO ADDITION TO RETAINED EARNINGS = 620 18.6 7.44 11.16 2126 2127 2128 AFN = [1-2-3] 14.04 2129 YIELD SPOT AFN BANKING NOTE Sheet2 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... :

? v 1 05:56 ENG 23-02-2020 13 X fix - AA AB AC AD AE AF AG AH AI AJ AK AL AM - AG2152 Z 2128 2129 2130 2131 2132 2133 2134 2135 PART 2 AFN = 0 = 0 = INCREASE IN ASSETS - INCREASE IN LIABILITIES - ADDITION TO RETAINED EARNINGS 122.5(X) - 17.5(X) - (500(1+x)(3%)(1-0.4)) 105(X) - 9(1+x) 9(1+X) 9 + 9(x) 105(X) = 105 (X) = 96(X) = X = 2136 0.09375 9.38% SELF SUPPORTING GROWTH RATE PART 3 BALANCE SHEET cash receivables inventory Total current assets 24%INCREASE 2019 2020 3.5 4.34 26 32.24 58 71.92 87.5 108.5 2137 2138 2139 2140 2141 2142 2143 2144 2145 2146 2147 2148 2149 2150 2151 2152 accounts payable notes payable LINE OF CREDIT accruals Total current liabilities mortgage bonds common stock retained earnings total liabilities & equity 24%INCREASE 2019 2020 9 11.16 18 18 0 14.04 8.5 10.54 35.5 53.74 net fixed assets 35 43.4 15 66 122.5 15 77.16 (66+11.16) 151.9 Total assets 122.5 151.9 YIELD SPOT AFN BANKING NOTE Sheet2 S1 S3 CLEAN PRICE $10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... +