Question

a) Discuss the process of preparing a financial plan.
b) What is the implied level of assets at the end of 2016?
c) If the company pays out 50% of net income as dividends, how much cash will
Drake need to raise in the capital markets in 2016?
d) If Drake is unwilling to issue any new shares to support the growth, what will be
the debt ratio at the end of 2016?

The following table summarizes the 2015 income statement and end-year balance sheet of Drake's Bowling Alleys (DBA). Income Statement (2015, figures in $000s) Sales 1,000 Notes: 40% of average assetsa Costs 750 75% of sales Interest expense 25 5% of debt at start of yearb Pre-tax profit 225 Tax 90 40% tax rate Net Income 135 Balance Sheet (year-end 2015, figures in $000s) Assets 2,600 Debt Equity 2,100 Total 2,600 Total 2,600 a Assets at year-end 2013 = $2,400,000 bDebt at year-end 2013 = $600,000 500 DBA's financial manager forecasts a 10% increase in sales and costs in 2016. The ratio of sales to average assets is expected to remain at 0.40. Interest is forecasted at 5% of debt at the start of the year.

Answer 1

Sales increases in 2016 10/ So Sales 1000 X 10/ 1D0 Cast also increases by, lo/ in a016 Cost 50 x 10 825 Iuterest is 57 of dle b $600, 000 x 5%- 30,000 St temd PL accouy CIncom Ooo % New Iloo Sales S25 Cost 30 Iuterst erp re tor prit245 40% tax Yake 9 8 Tax. 147 Net Ineome Bo New accet is Sales 100 Aus aut Avg Asset 2750 Avy asset

Sales increases in 2016 10/ So Sales 1000 X 10/ 1D0 Cast also increases by, lo/ in a016 Cost 50 x 10 825 Iuterest is 57 of dle b $600, 000 x 5%- 30,000 St temd PL accouy CIncom Ooo % New Iloo Sales S25 Cost 30 Iuterst erp re tor prit245 40% tax Yake 9 8 Tax. 147 Net Ineome Bo New accet is Sales 100 Aus aut Avg Asset 2750 Avy asset

Total Aciel 2016 s a7 So Total Net Tutom of a01s 145,000 S090 paid a divideud 13s, DOD A SD% 6 7, S00 Total cash esenes truaxt 67, S00 .Cost Cost of 4 2016 Cash ratsed by capital m let 825,000 - 67, SD 757,50D 2 Debt imereans y600,00 0+ 77, S0 1, 357, S0 1 Debt Debt rabo 1,357, Su .493 Aug ascet 31s0,000 Pis sales is increating cost on the broducan s abo ineyeasing financin planng tor igwd cash. we m the current So t is importa wtto prepane orober

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