Additional funds needed Morrissey Technologies Inc.\'s 2014 financial statements

Question

Additional funds needed

Morrissey Technologies Inc.'s 2014 financial statements are shown here.

Suppose that in 2015, sales increase by 15% over 2014 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2014 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 87.5% 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 2015 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 13%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent.

If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In otherwords, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places.
%

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2014 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

Firm's forcasted addition to retained earnings = $111,985

Firm's forecasted notes payable and long-term debt balances

= $70,650 and $264,850 (100000 + 164850)respectively.

Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2015 Sl No 2014 2015 Pro Forma Remarks' i Sales $     3,600,000 $         4,140,000 15% increased on 2014 value ii Operating costs (includes depreciation) $     3,279,720 $         3,622,500 87.5% of Sales iii EBIT $        320,280 $            517,500 iv Interest expense $         20,280 $             50,895 13% of total debt i.e (Short term bank loan + Notes payable + long term bonds) = (56000+100000+235500)*0.13 v EBT $        300,000 $            466,605 vi Taxes (40%) $        120,000 $            186,642 vii Net Income $        180,000 $            279,963 viii Dividends $            167,978 Last yaer's Dividend Pay out ratio i.e (1.08/1.8)*100 = 60% ix Addition to RE $            111,985

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