Symbolic Logic Corporation (SLC) is a technological leader in the application of
ID: 2728684 • Letter: S
Question
Symbolic Logic Corporation (SLC) is a technological leader in the application of surface mount technology in the manufacture of printed circuit boards used in the personal computer industry. The firm has recently patented an advanced version of its original path-breaking technology and expects sales to grow from their present level of $5 million to $8 million by the end of the coming year. Since the firm is at present operating at full capacity, it expects to have to increase its investment in both current and fixed assets in proportion to the predicted increase in sales.
The firm’s net profits were 7% of current year’s sales but are expected to rise to 8% of next year’s sales. To help support its anticipated growth in asset needs next year, the firm has suspended plans to pay cash dividends to its stockholders. In years past, a $1.25 per share dividend has been paid annually.
Symbolic Logic Corporation ($ millions)
Present Level
Percent of Sales
Projected Level
Current assets
$2.5
Net fixed assets
3.0
Total
$5.5
Accounts payable
$1.0
Accrued expenses
0.5
Notes payable
0.5
Current liabilities
$1.5
Long-term debt
$2.0
Common stock
0.5
Retained earnings
1.5
Common equity
$2.0
Total
$5.5
SLC’s payables and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds needed to finance next year’s operations and that are not forthcoming from other sources.
a. Fill in the table and project the firm’s needs for discretionary financing. Use notes payable as the balancing entry for any future discretionary financing needed.
b. Compare SLC’s current ratio and debt ratio (total liabilities/total assets) before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of SLC’s financial condition?
c. What difference, if any, would have resulted if SLC’s sales had risen to $6 million in one year and $8 million after only two years? Discuss only; no calculations are required.
Symbolic Logic Corporation ($ millions)
Present Level
Percent of Sales
Projected Level
Current assets
$2.5
Net fixed assets
3.0
Total
$5.5
Accounts payable
$1.0
Accrued expenses
0.5
Notes payable
0.5
Current liabilities
$1.5
Long-term debt
$2.0
Common stock
0.5
Retained earnings
1.5
Common equity
$2.0
Total
$5.5
Explanation / Answer
a) DFN needed: Symbolic Logic Corporation ($ millions) Present Level Percent of Sales Projected Level Current assets 2.50 50% 4.00 Net fixed assets 3.00 60% 4.80 Total 5.50 110% 8.80 Accounts payable 1.00 20% 1.60 Accrued expenses 0.50 10% 0.80 Notes payable 0.50 DFN + 1.26 1.76 Current liabilities 1.50 4.16 Long-term debt 2.00 2.00 Common stock 0.50 0.50 Retained earnings 1.50 (+ 8% of 8) 2.14 Common equity 2.00 2.64 Total 5.50 8.80 DFN needed is $1.26 million b) current ratio 1.67 0.96 debt ratio 0.64 0.70 Because of expanded sales the current ratio has deteriorated from 1.67 to 0.96, as the borrowing for financing the expanded sales is done through short term financing. The debt/assets ratio has also gone up to 0.70 from 0.64, indicating the need for external financing needed. c) The discretionary financing needed could be gradually increased ie: the required $1.25 m is to be raised in two years.
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