Forecasted Statements and Ratios Upton Computers makes bulk purchases of small c
ID: 2811463 • Letter: F
Question
Forecasted Statements and Ratios
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, 2018, is shown here (millions of dollars):
Sales for 2018 were $375 million and net income for the year was $11.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.5 million to common stockholders, so its payout ratio was 40%. Its tax rate was 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 2019. Do not round intermediate calculations.
If sales are projected to increase by $90 million, or 24%, during 2019, use the AFN equation to determine Upton's projected external capital requirements. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. 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, 2019. 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 2019 as they were in 2018. What is the amount of the line of credit reported on the 2019 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2019 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to two decimal places.
Explanation / Answer
a Additional Fund Needed = Total Assets - Total Liabilities - Stockholders equity 151.90-45.70-89.37 16.83 Additional Fund Needed = $ 16.83 million Total Assets Total Assets 2019 (465/375*122.50) 151.9 Spontaneous Liabilities Accounts Payable 9 Accruals 8.5 (465/375*17.50) 21.7 Notes Payable 18 Mortgage Loan 6 Total Liabilities 45.7 Common Stock 15 Retained Earnings 66 Add : Net Profit 465*3% 13.95 Less Dividend 13.95*40% 5.58 74.37 Stockholders equity 89.37 b So we will have to find the sales for 2019 for which there is no need for additional financing Total Assets 2019 (Sales/375*122.50) 0.32667 Sales Spontaneous Liabilities Accounts Payable 9 Accruals 8.5 (Sales/375*17.50) 0.046667 Sales Notes Payable 18 Mortgage Loan 6 Common Stock 15 Retained Earnings 66 Add : Net Profit 0.03*Sales Less Dividend (0.03*Sales)*40% Stockholders equity Therefore, the equation would be 0.32667 Sales =0.046667 Sales + 18 +6 + 15 + 66 + 0.03 sales - 0.012 sales 0.32667 Sales =0.046667 Sales + 105 + 0.03 sales - 0.012 sales 0.32667 Sales = 0.064667 Sales + 105 0.262003 Sales = 105 Sales = $ 400.76 million % Increase in Sales needed - 400.76/375 - 1 0.068693333 % Increase in Sales - 6.87% Upton Computers Pro Forma Balance Sheet 31-Dec-19 (Millions of Dollars) Cash 4.34 (465/375)*3.5 Receivables 32.24 (465/375)*26 Inventories 71.92 (465/375)*58 Total Current assets 108.50 Net Fixed Assets 43.40 (465/375)*35 Total Assets 151.90 Accounts Payable 11.16 (465/375)*9 Notes Payable 18.00 Line of Credit 16.83 Accruals 10.54 (465/375)*8.50 Total Current Liabilities 56.53 Mortgage Loan 6.00 Common Stock 15.00 Retained Earnings 74.37 Total Liabilities and equity 151.90
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