The firm is generating its proforma balance sheet for 2016. For the year 2015, sales were $4 million. Sales are expected to be $5 million in 2016. The company expects its net profit margin for 2016 to equal 5%. In each of the past several years, the company has been paying $50,000 in dividends to its stockholders. The company wants to increase dividends to $80,000 in 2016. The 2015 balance sheet for the company is below. Assume that Cash, Accounts Receivable, Inventories, and Accounts Payable vary directly with sales. Net Fixed Assets must increase by $175,000 to support the sales expansion. Any additional financing that Pioneer will need for 2016 will come from new long-term debt, but the company has a covenant that states that their ratio of total debt to total assets may not exceed 45%. How much additional financing will the company need? Can they pay the increased dividend, increase their long-term debt, and still satisfy the covenant? Show numbers to support your answer.
2015 BALANCE SHEET
CASH | 100,000 | ACCOUNTS PAYABLE | 600,00 |
ACCOUNTS RECEIVABLE | 400,000 | NOTES PAYABLE | 400,00 |
INVENTORIES | 1,200,000 | LONG TERM DEBT | 200,00 |
NET FIXED ASSET | 500,000 | STOCKHOLDERS' EQUITY | 1,000,000 |
TOTAL ASSET | 2,200,000 | TOTAL LIABILITIES & EQUITY | 2,200,000 |
Balance sheet | |||
2015 | |||
Assets | Amount | Liability & Equity | Amount |
Cash | 100000 | Account payable | 600000 |
Account receivable | 400000 | Note Payable | 400000 |
Inventories | 1200000 | Long Term Debt | 200000 |
Net Fixed Assets | 500000 | Stockholders Equity | 1000000 |
Total Assets | 2200000 | Total Liability & Equity | 2200000 |
It is important to mention here that normally Accounts payable and Notes Payble are part of short term debt in that case company is not matching the crieteria of 45% covenant in even year 2015 | |||
Total Assets (Cash, A/c Receivable,Inventory, NFA) | 2200000 | ||
Total Debt (A/c Payble, Note payable, Long Term Debt) | 1200000 | ||
% of Total Debt to Total Assets | 55% | ||
It shows that company is considering only amount borrowd as debt , in that case Account payable would not part of Total Debt | |||
Total Assets (Cash, A/c Receivable,Inventory, NFA) | 2200000 | ||
Total Debt (Note payable, Long Term Debt) | 600000 | ||
% of Total Debt to Total Assets | 27% | ||
2015 | 2016 | ||
Sales | 4000000 | 5000000 | |
Net profit Margin | 5% of sales | 200000 | 250000 |
Dividend | 50000 | 80000 | |
Ratio of 2015 | |||
Cash | 100000 | Sales | 4000000 |
Account receivable | 400000 | Sales | 4000000 |
Inventories | 1200000 | Sales | 4000000 |
Account payable | 600000 | Sales | 4000000 |
Cash To Sales | 2.50% | ||
Account receivableTo Sales | 10.00% | ||
InventoriesTo Sales | 30.00% | ||
Account payable To Sales | 15.00% | ||
Ratio of 2016 would be same as 2015 with sales | |||
Cash To Sales | 2.50% | ||
Account receivableTo Sales | 10.00% | ||
InventoriesTo Sales | 30.00% | ||
Account payable To Sales | 15.00% | ||
Cash | 125000 | Sales | 5000000 |
Account receivable | 500000 | Sales | 5000000 |
Inventories | 1500000 | Sales | 5000000 |
Account payable | 750000 | Sales | 5000000 |
Net fixed assets of 2015 | 5,00,000.00 | ||
Increase in 2016 | 1,75,000.00 | ||
Total | 6,75,000.00 | ||
Balance sheet | |||
2016 | |||
Cash | 125000 | Account payable | 750000 |
Account receivable | 500000 | Note Payable | 400000 |
Inventories | 1500000 | Long Term Debt | 200000 |
Net Fixed Assets | 6,75,000 | Stockholders Equity | 1000000 |
Total Assets | 2800000 | Total Liability & Equity | 2350000 |
As it can be seen that if All derived figures make a Balance Sheet assuming that this is situation after payment of dividend there is imbalance in Asset side and "Equity & Liabilities" side. i.e (2800000-2350000=450000) | |||
This shortage balancing figure would be met from long term borrowing. It means additional funding of 450000 would be required. | |||
Balance sheet | |||
2016 | |||
Cash | 125000 | Account payable | 750000 |
Account receivable | 500000 | Note Payable | 400000 |
Inventories | 1500000 | Long Term Debt | 650000 |
Net Fixed Assets | 675000 | Stockholders Equity | 1000000 |
Total Assets | 2800000 | Total Liability & Equity | 2800000 |
Total Debt (notes payable +long Term debt) | 1050000 | ||
38% | |||
Additional fund | Long term debt of 2015 | 200000 | |
Long term debt of 2016 | 650000 | ||
Additional funding required | 450000 |
The firm is generating its proforma balance sheet for 2016. For the year 2015, sales were $4 mill...
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