Upton Computers makes bulk purchases of small computers, stocks them in convenie

Question

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2013, is shown here (millions of dollars):

Sales for 2013 were $200 million and net income for the year was $6 million, so the firm's profit margin was 3.0%. Upton paid dividends of $2.4 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio remain constant in 2014. Do not round intermediate calculations.

If sales are projected to increase by $70 million, or 35%, during 2014, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$   ________ million

Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
________ %

Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2014. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
Assume Upton's profit margin and dividend payout ratio will be the same in 2014 as they were in 2013. What is the amount of the line of credit reported on the 2014 forecasted balance sheets? (Hint:You don't need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2014 addition to retained earnings for the balance sheet.) Round your answers to the nearest cent.

Cash $   3.5 Accounts payable $   9.0 Receivables 26.0 Notes payable 18.0 Inventories 58.0 Line of credit 0 Total current assets $ 87.5 Accruals 8.5 Net fixed assets 35.0 Total current liabilities $ 35.5 Mortgage loan 6.0 Common stock 15.0 Retained earnings 66.0 Total assets $122.5 Total liabilities and equity $122.5

Explanation / Answer

Additional Funds Needed = Ao × S Lo × S × S1 × PM × b So So Where, Ao = current level of assets S/So = percentage increase in sales i.e. change in sales divided by current sales Lo = current level of liabilities S1 = new level of sales PM = profit margin b = retention rate = 1 – payout rate Additional funds needed = increase in assets increase in liabilities – increase in retained earnings Increase in asset= 122.5*35% 42.875 Spontaneous increase in liabilities= 41.5*35% 14.525 Increase in retained earnings =270*3%*(1-.6) 3.24 Additional fund needed = 42.875-14.525-3.24 25.11 Self supporting growth rate= M(1 POR)S0 A0* L0* M(1 POR)S0 (.03*(1-.4)*200)/((122.5-41.5-(.03*(1-.4)*200)) 4.65% Cash 28.61 Receivables 35.1 Inventories 78.3 Total current assets 142.01 Net fixed assets 47.25 Total assets 189.26 Accounts payable 12.15 Notes payable 24.3 Accruals 11.475 Total current liabilities 47.925 Mortgage loan 8.1 Common stock 15 Retained earnings 118.235 Total liabilities and equity 189.26

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