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):
Cash | $ 3.5 | Accounts payable | $ 9.0 | |
Receivables | 26.0 | Notes payable | 18.0 | |
Inventories | 58.0 | Line of credit | 0 | |
Total current assets | $ 87.5 | Accruals | 8.5 | |
Net fixed assets | 35.0 | Total current liabilities | $ 35.5 | |
Mortgage loan | 6.0 | |||
Common stock | 15.0 | |||
Retained earnings | 66.0 | |||
Total assets | $122.5 | Total liabilities and equity | $122.5 |
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.
Upton Computers Pro Forma Balance Sheet December 31, 2019 (Millions of Dollars) |
||
Cash | $ | |
Receivables | $ | |
Inventories | $ | |
Total current assets | $ | |
Net fixed assets | $ | |
Total assets | $ | |
Accounts payable | $ | |
Notes payable | $ | |
Line of credit | $ | |
Accruals | $ | |
Total current liabilities | $ | |
Mortgage loan | $ | |
Common stock | $ | |
Retained earnings | $ | |
Total liabilities and equity |
We can calculate the desired result as follows:
A) Additional Funds Required = (Ao x (Increase in Sales %)) - (Lo x (Increase in Sales %)) - (S1x PM x b)
Ao= current level of assets
Lo = current level of liabilities
S1 = New Level of Sales
PM = Profit margin
b (retention rate) = 1 - payout rate
AFN = (122.5 x 0.177778) - ((8.5 + 9) x 0.177778) - ((225 + 40) x 0.03 x (1 - 0.40))
= 21.78 - 3.111 - 4.77
= $ 13.90 or $ 13.90 million
b). AFN = (((current level of assets / Previous year sales - (current level of liabilities / Previous year sales)) - [PM × b ×(1+g) / g)) * Increase in Sales
0 = (((122.5 / 225) - (17.5 / 225) - (0.03 * 0.6 * (1 + g) / g)) * 40
0 / 40 = 0.5444 - 0.077778 - (0.018 * (1 + g) / g)
0 = 0.4666 - (0.018 + 0.018g) / g
0 = [0.4666g - 0.018 + 0.018g] / g
0 * g = 0.4486g - 0.018
0.4486g = 0.018
g = 0.018 / 0.4486
= 0.0401 or 4.01%
c) Performa Balance for 2019 is as follows:
Formulas used in the excel sheet are:
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