Question

6. Projected financial statements and basic analysis

You are the most creative analyst for Saltwater Logistics Corp., and your admirers want to see you work your analytical magic once more.

	2016 Actual Results	2017 Initial Forecast
Net sales	$16,000	$19,200
Cost of goods sold	(12,800)	(15,360)
Gross profit	$3,200	$3,840
Fixed operating costs except depreciation	(800)	(960)
Depreciation	(320)	(384)
Earnings before interest and taxes	$2,080	$2,496
Interest	(320)	(320)
Earnings before taxes	$1,760	$2,176
Taxes	(704)	(870.4)
Net income	$1,056	1,305.6
Common dividends	(570.24)	(570.24)
Addition to retained earnings	$485.76	$735.36
Earnings per share	$52.8	$65.28
Dividends per share	$28.512	$28.512
Number of common shares (millions)	20.0	20.0

Which of the following are assumptions made by the initial income statement forecast? Check all that apply.

The assigned depreciation method has changed.

Additional external financing will be required by Saltwater Logistics Corp.

No additional external financing will be required.

The forecasted increase in net sales is 20%.

The facility is currently operating at full capacity.

The facility is not currently operating at full capacity.

If Saltwater Logistics Corp. had neither a sufficient amount of excess capacity to handle forecasted increases in operations nor the level of retained earnings required to increase asset levels up to the necessary level for production, this difference would be referred to as additional funds needed    and could be acquired in which of the following forms?

I. Issuing additional common stock

II. Borrowing from a bank using notes payable

III. Issuing long-term bonds

I only

Just II

I and II

I, II, and III

Just III

II and III

Answer 1

Q1: Options 3,4 & 5

• The forecasted percentage increase in sales is =[($19200-$16000)/16000]= 20%
• We can see from the table that fixed and variable costs move in tandem with the sales increase (20%) => (960) from (800), it is implied that it will need to increase its capacity to meet future sales forecasts
• Interest expense in both the cases comes to $320m and also the common dividends paid is equal implying that no additional debt has to be rised for the moment
• Depreciation method has not been changed as it has increased by the same amout i.e; 320x1.2 =384

Q2: The additional funds could be acquired in the form of issuing addtional common stock, borrowing additional funds from bank or by issuing a notes payable or long term bonds. Hence, I,II and III