Additional funds needed Morrissey Technologies Inc.\'s 2012 financial statements

Question

Additional funds needed

Morrissey Technologies Inc.'s 2012 financial statements are shown here.

Suppose that in 2013, sales increase by 15% over 2012 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2012 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its Operating costs/Sales ratio to 89.5% and increase its total debt-to-assets ratio to 30%. (It believes that its current debt ratio is too low relative to the industry average.) The firm will raise 30% of 2013 forecasted total debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short-term and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2012 Cash $180,000 Accounts payable $360,000 Receivables 360,000 Notes payable 56,000 Inventories 720,000 Accrued liabilities 180,000 Total current assets $1,260,000 Total current liabilities $596,000 Long-term debt 100,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000

Explanation / Answer

Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2013 2012 2013 Pro Forma Sales $            3,600,000 $        4,140,000.00 Operating costs (includes depreciation) $            3,279,720 $        3,705,300.00 EBIT $                320,280 $            434,700.00 Interest expense $                  20,280 $              46,980.00 EBT $                300,000 $            387,720.00 Taxes (40%) $                120,000 $            155,088.00 Net Income $                180,000 $            232,632.00 Dividends $                108,000 $            139,579.20 Addition to RE $                  72,000 $              93,052.80 Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2013 2012 2013 Pro Forma Cash $                180,000 $                  207,000 Accounts receivable $                360,000 $                  414,000 Inventories $                720,000 $                  828,000 Fixed assets $            1,440,000 $              1,656,000 Total assets $            2,700,000 $              3,105,000 Payables + accruals $                540,000 $                  540,000 Short-term bank loans $                  56,000 $                  279,450   Total current liabilities $                596,000 $                  819,450 Long-term bonds $                100,000 $                  112,050   Total debt $                696,000 $                  931,500 Common stock $            1,800,000 $        1,876,447.20 Retained earnings $                204,000 $            297,052.80   Total common equity $            2,004,000 $              2,173,500 Total liab. and equity $            2,700,000 $              3,105,000

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