The most recent financial statements for Fleury Inc., follow. Sales for 2012 are

Question

The most recent financial statements for Fleury Inc., follow. Sales for 2012 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.

What is the EFN if the firm was operating at only 80 percent of capacity in 2011? Assume that fixed assets are sold so that the company has a 100 percent asset utilization.

The most recent financial statements for Fleury Inc., follow. Sales for 2012 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets and accounts payable increase spontaneously with sales.

Explanation / Answer

Fleury Inc. Pro Forma Income Statement Sales (751000 X 1.20)          901,200 Less: Costs (586000 X 1.20)          703,200 Less: Other Exp. (22000 X 1.20)            26,400 EBIT          171,600 Interest            18,000 Taxable Income          153,600 Taxes (40%)            61,440 Net Income            92,160 Payout Ratio is constant. Dividends = (30000 / 75000) X 92160 = $36864 Addition to Retained Earnings = 92160 - 36864 = 55296 New Retained Earnings = 41120 + 55296 = 96416 Fleury Inc. Pro Forma Balance Sheet Assets Amt. Liabilities & Owners' Capital Amt. Current assets Current Liabilities Cash (21040 X 1.20)            25,248 Accounts Payable (55200 X 1.20)            66,240 Accounts Receivables (33360 X 1.20)            40,032 Notes Payable (14400 X 1.20)            17,280 Inventory (70320 X 1.20)            84,384 Total            83,520 Total          149,664 Long term Debt          134,000 Fixed Assets Owners's Equity Net Plant & equipment (240000 X 1.2)          288,000 Common stock and paid-in surplus          120,000 Retained Earnings            96,416 Total          216,416 Total Assets          437,664 Total Liabilities & Owners' Capital          433,936 Now, we have to adjust fixed assets so the company has 100% asset utilization. Full Capacity Sales = 751000 / .80 = $938750 Full Capacity Ratio = Fixed Assets / Full Capacity Sales Full Capacity Ratio = 240000 / 938750 = 0.255659 Fixed Assets Required at Full Capacity sales at full capacity ratio times the projected sales level: Total Fixed Assets = 0.255659 x 901200 = 230400 EFN = [149664 (Current Assets) + 230400 (Total Fixed Assets Required)] - 433936 (total liabilities & owners Capital) EFN = -53872

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