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

1) The AFN Equation is given below:

AFN = (A*/S0)S – (L*/S0)S – MS1(RR)

Substituting values in the above equation, we have

(122.5/200)*70 - (17.5/200)*70 - 0.03*270*0.6 = 42.875 - 6.125 - 4.86 = $31.89 million.

So AFN = $31.89 million.

2) 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 non-spontaneous external funds ?

AFN = (A*/S0)S – (L*/S0)S – MS1(RR)

For non-spontaneous external funds to be '0', the value of the above equation should be '0'.

So MS1(RR) = (A*/S0)S – (L*/S0)S

Substituting values, we have

0.03*0.6*S1 = (122.5/200)*S - (17.5/200)*S; 0.018*S1 = S*(0.6125 - 0.0875); 0.018*S1 = 0.525*S

S/S1 = 0.018/0.525 = 0.03429 = 3.43%; Therefore, S/S0 = 3.429/(100-3.429) = 3.5505 = 3.55%

So maximum possible growth rate without non-spontaneous funds = 3.55% .

3)

The amount of line of credit = $31,890,000 million

Forecasted Balance Sheet: Cash 4.725 Receivables 35.100 Inventories 78.300 Total current Assets 118.125 Net Fixed Assets: 47.250 Total Assets 165.375 Accounts Payable 12.150 Notes payable 18.000 Line of credit 31.890 Accruals 11.475 Total current liabilities 73.515 Mortgage Loan 6.000 Common stock 15.000 Retained Earnings 70.860 Total Liabilities & Equity 165.375

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