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, 2018, is shown here (millions of dollars): 18.0 Cash Receivables Inventories Total current assets Net fixed assets $ 3.5 Accounts payable 26.0 Notes payable 58.0 Line of credit $87.5 Accruals 35.0 Total current liabilities Mortgage loan Common stock Retained earnings $122.5 Total liabilities and equity $35.5 15.0 66.0 $122.5 Total assets Sales for 2018 were $225 million and net income for the year was $6.75 million, so the firm's profit margin was 3.0%. Upton paid dividends of $2.7 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, 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 2019. Do not round intermediate calculations a. If sales are projected to increase by $50 million, or 22.222222during 2019, 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 b. 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 c. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2019. 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 2019 as they were in 2018. What is the amount of the line of credit reported on the 2019 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio these gures allow you to calculate the 2019 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to two decimal places

Answer 1

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- 2x AN 3% BOND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill Paste Merge & Center - Sort & BI U D A $ -% Find & Format Painter Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing AJ1566 O AA AB AC AD AE AF AG AH AI AJ AK AL AM 1564 UPTON 1565 SALES 225 1566 DIVIDEND PAYOUT 40% 1567 PROFIT MARGIN = 1568 SALES GROWTH 22.22222% 1569 1 INCREASE IN ASSETS NECESSARY TO SUPPORT INCREASE IN SALES = INCREASE IN SALES X TOTAL ASSETS 1570 122.5 x 22.2222% = 27.2222 1571 1572 2 INCREASE IN LIABILITIES NECESSARY TO SUPPORT INCREASE IN SALES = INCREASE IN SALES X TOTAL ASSETS 1573 ACCOUNTS PAYABLE + ACCRUED LAIBILITIES = 17.5 X 22.2222% = 3.88889 1574 1575 3 COMPANY WILL MAINTAIN PROFIT MARGIN & DIVIDEND PAYOUT 1576 INCOME THAT WILL BE ADDED TO RETAINED EARNINGS 1577 NEW SALES = 225 + 50 = 275 1578 PROFIT = 3%* 275 = 8.25 1579 LESS DIVIDEND PAYOUT (40%) = 1580 SO ADDITION TO RETAINED EARNINGS = 4.95 1581 1582 AFN = [1-2-3] 18.38 1583 1584 ► YIELD SPOT Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARRANT refund S4 S5 S6 0 Rea ferences: 1998 BOU 120% -_- EJENO 9 * 10 ENG 3.3 0 20-11-2019

- 2x AN 0= BOND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill Paste BI U D A Merge & Center - $ -% Conditional Format Format Painter Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing AJ1589 fax A AA AB AC AD AE AF AG AH AL AJ A K AL AM 1584 1585 PART 2 AFN = INCREASE IN ASSETS - INCREASE IN LIABILITIES - ADDITION TO RETAINED EARNINGS 1586 0= 122.5(X) - 17.5(X) - (225(1+x)(3%)(1-0.4)) 1587 105(X) - 4.05(1+x) 1588 105(X) = 4.05(1+x) 1589 100.95(X) = 4.05 1590 X= 0.040118871 1591 X= 4.01% SELF SUPPORTING GROWTH RATE 1592 1593 PART 3 BALANCE SHEET 22.22% INCREASE 22.22% INCREASE 1594 2018 2019 2018 2019 1595 cash 3.5 4.28 accounts payable 9 11.00 1596 receivables 26 31.78 notes payable 1597 inventory 58 70.89 LINE OF CREDIT 18.38 [BALANCING FIGURE] 1598 Total current assets 87.5 106.94 accruals 8.5 10.39 1599 Total current liabilities 35.5 57.77 1600 mortgage bonds 6 1601 net fixed assets 35 42.78 common stock 15 15 1602 retained earnings 66 70.95 (66+ 4.95) 1603 Total assets 122.5 149.72 total liabilities & equity 122.5 149.72 1604 HEM YIELD SPOT Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE $10 BIDDING, UNDERWRITING EUAC AW LIFELP, IP, MRP, INFLATION WARRANT refund 54 55 56 0 0 Rea ferences: FY395 B0 120% DOR . * 10 ENG 18 18 0 20-11-2019