Question

Morrissey Technologies Inc.'s 2019 financial statements are shown here. Morrissey Technologies Inc.: Balance Sheet as of December 31, 2019

Cash $180,000 Accounts payable $360,000 Receivables 360,000 Notes payable 56,000 Inventories 720,000 Accrued liabilities 180,000 Total current assets $1,260,000 Total current liabilities $596,000 Long-term debt 100,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000

Morrissey Technologies Inc.: Income Statement for December 31, 2019

Sales $3,600,000 Operating costs including depreciation 3,279,720 EBIT $320,280 Interest 20,280 EBT $300,000 Taxes (25%) 75,000 Net Income $225,000 Per Share Data: Common stock price $45.00 Earnings per share (EPS) $2.25 Dividends per share (DPS) $1.35

Suppose that in 2020, sales increase by 15% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 88.5% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2020 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12.5%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

A.) Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Do not round intermediate calculations. Round your answers to the nearest cent. Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2020 2019 2020 Sales $3,600,000 $ Operating costs (includes depreciation) 3,279,720 EBIT $320,280 $ Interest expense 20,280 EBT $300,000 $ Taxes (25%) 75,000 Net Income $225,000 $ Dividends (60%) $ $ Addition to retained earnings $ $

Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2020 2019 2020 Assets Cash $180,000 $ Accounts receivable 360,000 Inventories 720,000 Fixed assets 1,440,000 Total assets $2,700,000 $ Liabilities and Equity Payables + accruals $540,000 $ Short-term bank loans 56,000 Total current liabilities $596,000 $ Long-term bonds 100,000 Total liabilities $696,000 $ Common stock 1,800,000 Retained earnings 204,000 Total common equity $2,004,000 $ Total liabilities and equity $2,700,000 $

B.) If the profit margin remains at 6.25% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In other words, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Do not round intermediate calculations. Round your answer to two decimal places. %

Answer 1

Ans

a.i. Balance Sheet & income statement for 2019

Balance Sheet- 31st Dec; 2019
Liability	$	Asset	$
Accounts payable	360,000.00	Cash	18,000.00
Notes Payable	56,000.00	Receivable	360,000.00
Accrued Liability	180,000.00	Inventory	720,000.00
	-	Other Current Assets	162,000.00
Common Stock	1,800,000.00	Fixed Assets	1,440,000.00
Retained Earning	204,000.00
Long Term Debt	100,000.00
Total Liability	2,700,000.00	Total Assets	2,700,000.00

Income Statement-31st Dec. 2019
Sales	3,600,000
Operating Cost Including Dep	3,279,720.00
EBIT	320,280.00
Interest	20,280.00
EBT	300,000.00
Taxes (25%)	75,000.00
Net Income	225,000.00
Common Stock Price	45.00
EPS	2.25
Dividend per Share	1.35
No of Shares outstanding	100,000.00
Dividend Paid	135,000.00
Retained Earning	90,000.00

ii. Balance Sheet & Income Statement for 2020

Balalnce Sheet- 31st Dec; 2020
Liability	$	Asset	$
Common Stock	1,941,367.25	Cash	20,700.00
Retained Earning	288,132.75	Receivable	414,000.00
Accounts payable	360,000.00	Inventory	828,000.00
Accrued Liability	180,000.00	Other Current Assets	186,300.00
Notes Payable	16,800.00
Long Term Debt	100,000.00	Fixed Assets	1,656,000.00
Long Term Bonds Payable	218,700.00
Total Liability	3,105,000.00	Total Assets	3,105,000.00

Income Statement-31st Dec. 2020
Sales (115% of 2019 level)	4,140,000
Operating Cost Including Dep	3,663,900
(88.5% of Sales)
EBIT	320,280
Interest (12.5%)	39,838
EBT	280,443
Taxes (25%)	70,111
Net Income	210,332
Divident Paid	126,199
Addition to Retained Earning	84,133
Common Stock Price	45.00
EPS	2.10
Dividend per Share	1.26
No of Shares outstanding-2019	100,000.00
Additional Share purchased-2020	5437

IWorking Notes for year 2020

1, All assets growing @15%- accordingly 2020 figures of all assets increased by 115%

2. Growth in sales is 15%

3. Operating cost incl Dep for 2020 = 88.5% X sales

4. Ratio Total Liability/Total Assets =30%

Total Lib. = Total Asset X 30% = 3105000 x 30% = 931500

Existing Lib of 2019 (excluding Common Stock & Retained earning )=696000

Additional lib = 931500-696000= 235500

Notes Payable	56000 X 30%	16,800.00
Long Term Bond	remainder	218,700.00
		235,500.00

5. Cost of Debt 12.5%

Long Term Debt	100,000.00
Long Term Bonds Payable	218,700.00
Total Debt	318,700.00
Interest	39,837.50

Ans b)

When sale will grow @ 141% then there will be no additional fund requirement

Income Statement-31st Dec. 2020
Sales	8,673,077
	-
Net Income -6.5%	563,750
Divident Paid 60%	338,250
Addition to Retained Earning	225,500

Balalnce Sheet- 31st Dec; 2020
Liability	$	Asset	$
Common Stock	1,800,000.00	Cash	20,700.00
Retained Earning	429,500.00	Receivable	414,000.00
Accounts payable	360,000.00	Inventory	828,000.00
Accrued Liability	180,000.00	Other Current Assets	186,300.00
Notes Payable	16,800.00
Long Term Debt	100,000.00	Fixed Assets	1,656,000.00
Long Term Bonds Payable	218,700.00
Total Liability	3,105,000.00	Total Assets	3,105,000.00