At the most recent strategic planning meeting, the board of directors of your co
ID: 2619309 • Letter: A
Question
At the most recent strategic planning meeting, the board of directors of your company has voted to issue additional stock to raise capital for major expansions for the company in the next five years. The board is considering $5 billion. Take the 2017 financial statements and prepare a set of projected financial statements based on the given assumptions. The CEO requests that you prepare a written report (including the financial statements) for her.
C. Generate a projected statement of retained earnings based on the given scenario.
D. Analyze the impact on the statement of retained earnings based on the given scenario.
Statement of retained earnings (VALUE IN 000'S)
2017
Retained earnings, 2016 8,188,000
plus net income 2,737,000
total =10,925,000
minus dividends (1,356,000)
retained earnings, 2017 9,569,000
Income statements
Period Ending
1/28/2017
1/30/2016
Total Revenue
$69,495,000
$73,785,000
Cost of Revenue
$48,872,000
$51,997,000
Gross Profit
$20,623,000
$21,788,000
Research and Development
$0
$0
Sales, General and Admin.
$13,356,000
$14,665,000
Non-Recurring Items
$0
$0
Other Operating Items
$2,298,000
$2,213,000
Operating Income
$4,969,000
$4,910,000
Additional income/expense items
$0
$620,000
Earnings Before Interest and Tax
$4,969,000
$5,530,000
Interest Expense
$1,004,000
$607,000
Earnings Before Tax
$3,965,000
$4,923,000
Income Tax
$1,296,000
$1,602,000
Minority Interest
$0
$0
Equity Earnings/Loss Unconsolidated Subsidiary
$0
$0
Net Income-Cont. Operations
$2,669,000
$3,321,000
Net Income
$2,737,000
$3,363,000
Net Income Applicable to Common Shareholders
$2,737,000
$3,363,000
Current Assets
Cash and Cash Equivalents
$2,512,000
$4,046,000
Short-Term Investments
$0
$0
Net Receivables
$0
$0
Inventory
$8,309,000
$8,601,000
Other Current Assets
$1,169,000
$1,483,000
Total Current Assets
$11,990,000
$14,130,000
Long-Term Assets
Long-Term Investments
$0
$0
Fixed Assets
$24,658,000
$25,217,000
Goodwill
$0
$0
Intangible Assets
$0
$0
Other Assets
$783,000
$915,000
Deferred Asset Charges
$0
$0
Total Assets
$37,431,000
$40,262,000
Current Liabilities
Accounts Payable
$10,989,000
$11,654,000
Short-Term Debt / Current Portion of Long-Term Debt
$1,718,000
$815,000
Other Current Liabilities
$1,000
$153,000
Total Current Liabilities
$12,708,000
$12,622,000
Long-Term Debt
$11,031,000
$11,945,000
Other Liabilities
$1,878,000
$1,915,000
Deferred Liability Charges
$861,000
$823,000
Misc. Stocks
$0
$0
Minority Interest
$0
$0
Total Liabilities
$26,478,000
$27,305,000
Stock-Holders Equity
Common Stocks
$46,000
$50,000
Capital Surplus
$5,661,000
$5,348,000
Retained Earnings
$5,884,000
$8,188,000
Treasury Stock
$0
$0
Other Equity
($638,000)
($629,000)
Total Equity
$10,953,000
$12,957,000
Total Liabilities & Equity
$37,431,000
$40,262,000
Cash Flow
Net Income
$2,737,000
$3,363,000
Cash Flow-Operating Activities
Depreciation
$2,298,000
$2,213,000
Net Income Adjustments
$508,000
($812,000)
Changes in Operating Activities
Accounts Receivable
$0
$0
Changes in Inventories
$293,000
($316,000)
Other Operating Activities
$36,000
$227,000
Liabilities
($543,000)
$579,000
Net Cash Flow-Operating
$5,436,000
$5,958,000
Cash flows-Investing Activities
Capital Expenditures
($1,547,000)
($1,438,000)
Investments
$28,000
$24,000
Other Investing Activities
$46,000
$1,922,000
Net Cash Flows-Investing
($1,473,000)
$508,000
Cash Flows-Financing Activities
Sale and Purchase of Stock
($3,485,000)
($3,183,000)
Net Borrowings
($664,000)
($85,000)
Other Financing Activities
$0
$0
Net Cash Flows-Financing
($5,497,000)
($4,630,000)
Effect of Exchange Rate
$0
$0
Net Cash Flow
($1,534,000)
$1,836,000
Income statements
Period Ending
1/28/2017
1/30/2016
Total Revenue
$69,495,000
$73,785,000
Cost of Revenue
$48,872,000
$51,997,000
Gross Profit
$20,623,000
$21,788,000
Research and Development
$0
$0
Sales, General and Admin.
$13,356,000
$14,665,000
Non-Recurring Items
$0
$0
Other Operating Items
$2,298,000
$2,213,000
Operating Income
$4,969,000
$4,910,000
Additional income/expense items
$0
$620,000
Earnings Before Interest and Tax
$4,969,000
$5,530,000
Interest Expense
$1,004,000
$607,000
Earnings Before Tax
$3,965,000
$4,923,000
Income Tax
$1,296,000
$1,602,000
Minority Interest
$0
$0
Equity Earnings/Loss Unconsolidated Subsidiary
$0
$0
Net Income-Cont. Operations
$2,669,000
$3,321,000
Net Income
$2,737,000
$3,363,000
Net Income Applicable to Common Shareholders
$2,737,000
$3,363,000
Explanation / Answer
Positive net income will add to the retained earnings in the next year. Raising the shares outstanding will certainly reduce earning per share unless the capital raised is employed effectively to generate higher returns than the cost of equity. Also, if dividend per share is kept constant, it will reduce Retained earnings but if the aggregate dividends amount is constant, then there will be no impact by dividends.
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