Mansfield Corporation had 2013 sales of $100 million. The balance sheet items th

ID: 2775025 • Letter: M

Question

Mansfield Corporation had 2013 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

The dividend payout rate is 50 percent of earnings, and the balance is retained earnings at the end of 2013 was $33 million. Notes payable are currently $7 million. Long-term bonds and common stock are constant at $5 million and $10 million, respectively.

a. How much additional external capital will be required for next year if sales increase by 15 percent? (Assume that the company is already operating at full capacity.)

b. What will happen to external fund requirements is Mansfield Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these seperately.

c. Prepare a pro forma balance sheet for 2014 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part B in answering this question (that is, use the original information and part A in constructing your pro forma balance sheet).

Cash 5% Accounts Receivable 15% Inventory 20% Net Fixed Assets 40% Accounts Payable 15% Accurals 10% Profit Margin after taxes 10%

Explanation / Answer

Current assets = 5% + 15% + 20% + 40% = 80%

Current liabilities = 15% + 10% = 25%

Where:

RNF is Required New Funds

DS is Change in sales

is the Percentage Relationship of Variable (Spontaneous) Assets to Sales

is the Percentage Relationship of Variable (Spontaneous) Liabilities to Sales

P is the Profit Margin

D is the Dividend Payout Ratio

Balance Sheet - December 31, 2014

($ millions)

Cash

$ 5.75

Accounts payable

$17.25

Accounts receivable

17.25

Accruals

11.50

Inventory

23.00

Notes payable

7+2.5=

9.51

Net capital assets

46.00

Long-term bonds

5.00

Common stock

10.00

Retained earnings

38.752

$92

1 Original notes payable plus required new funds. This is the plug figure.

2 2013 retained earnings (beginning of 2014) + PS2 (1 - D)