Upton\'s Computers makes bulk purchases of small cpmputers, stocks them in conve
ID: 2763665 • Letter: U
Question
Upton's Computers makes bulk purchases of small cpmputers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Upton's balance sheet as of December 31, 2006 is shown here (millions of dollars)
Sales for 2006 were $350 millions, while ner income for the year was $10.5 million. Upton's paid dividends of $4.2 million to common stockholders. The firm is operating at full capacity. Assume that all ratios remain constant.
a. if sales are projected to increase by $70 million, or 20%, during 2007, determine Upton's projected external capital requirments.
b. Determine Upton's projected external capital requirement if the increase in sales is expexted to be carried out without any expansion of fixed assets.
c- How much can sales grow above 2006 of $350 miilion without requiring any additional funds?
Explanation / Answer
Answer for question no.a:
Ratios for the year 2006:
Current assets = Current assets/ Current liabilites =87.5/42.6 =2.054.
Total assets to turnover ratio = Turnover/Total assets =350/122.50
=2.857
Sales of 2007 =350*120% =$420 million.
So, the total assets for the year 2007 = 420/2.857 = 147.
Fixed assets turnover ratio for 2006 =Turnover/ Fixed assets
=350/35
=10 times.
So, projected fixed assets for the year 2007 = turnover/ Fixed asset turnover ratio
=$420/10 =$42.
Therefore, current assets = Total assets - Fixed assets
=$147 -42 =105.
Substituting the values in the formula for current ratio, current liabilities = 105/2.054.
=51.12.
Debt equity ratio:
Debt to equity ratio = Total liabilites/Equity.
=41.5/81
=0.51234.
Net profit/sales for 2006 =10.5/350 =3%
Net profit for the year 2007 =420*3% =12.6 million.
Dividend pay out ratio = 4.2/10.5= 40%.
Dividend paid for year 2007 =12.6 * 40% =5.04 million.
Profits retained for the year 2007 =12.6 -5.04 = $7.56 million.
Therefore equity for the year 2007 = common stock+ retained earnings fo r2006 +Profit after dividend for 2007
=88.56 million.
Total liabilities for the year 2007 =147 - 88.56
=$58.44 million.
Long term liabilites + current liabilities =$58.44 million
Long term liabilities or external financing required= 58.44 - 51.12
=7.32 million.
Already existing mortage loan = 6 million.
Therefore, external financing required = 7.32 -6 =1.32 million.
Answer for question no.b:
If the fixed assets are not growing then current assets would be $147 million - 35 million =112 million.
Therefore current liabilities would be =112/2.054
=$54.528million.
Total liabilities - current liabilities - Equity = Long term borrowings
=147 - 54.528 -88.56
=3.912 million
External financing required = 3.912 million.
Answer for question no.c:
Total funds required to support sales of $420 million= 147 million.
If additional financing is not required then balance sheet size would be =$147 million - 1.32 million
=145.68 million.
Given Total assets to turnover ratio is 2.857 times.
Therefore sales would be 145.68 *2.857
=416.228 i.e., 416.23 million.
Increase in sales with out any additional funds being raised =416.23 million - 350 million
=66.23 million.
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