Solved by verified expert :Problem 17-8
Long-term financing needed
At year-end 2012, total assets for Ambrose
Inc. were $1.8 million and accounts payable were $305,000. Sales, which in 2012
were $2.7 million, are expected to increase by 30% in 2013. Total assets and
accounts payable are proportional to sales, and that relationship will be
maintained; that is, they will grow at the same rate as sales. Ambrose
typically uses no current liabilities other than accounts payable. Common stock
amounted to $480,000 in 2012, and retained earnings were $330,000. Ambrose
plans to sell new common stock in the amount of $170,000. The firm’s profit
margin on sales is 3%; 50% of earnings will be retained.
1.
What
was Ambrose’s total debt in 2012? Write out your answer completely. For
example, 25 million should be entered as 25,000,000. Round your answer to the
nearest cent.
$
2.
How
much new long-term debt financing will be needed in 2013? Write out your answer
completely. For example, 25 million should be entered as 25,000,000. Round your
answer to the nearest cent. (Hint: AFN – New stock = New long-term
debt.)
$
Problem
17-9
Sales
increase
Pierce
Furnishings generated $4 million in sales during 2012, and its year-end total
assets were $2.8 million. Also, at year-end 2012, current liabilities were
$500,000, consisting of $200,000 of notes payable, $200,000 of accounts
payable, and $100,000 of accrued liabilities. Looking ahead to 2013, the
company estimates that its assets must increase by $0.70 for every $1.00
increase in sales. Pierce’s profit margin is 4%, and its retention ratio is
45%. How large of a sales increase can the company achieve without having to
raise funds externally? Write out your answer completely. For example, 25
million should be entered as 25,000,000. Round your answer to the nearest cent.
$
Problem 17-11
Regression and inventories
Charlie’s Cycles Inc. has $90 million in
sales. The company expects that its sales will increase 5% this year. Charlie’s
CFO uses a simple linear regression to forecast the company’s inventory level
for a given level of projected sales. On the basis of recent history, the
estimated relationship between inventories and sales (in millions of dollars)
is as follows:
Inventories = 15 +
0.1540(Sales)
1.
Given
the estimated sales forecast and the estimated relationship between inventories
and sales, what are your forecasts of the company’s year-end inventory level?
Enter your answer in millions. For example, an answer of $25,000,000 should be
entered as 25. Round your answer to two decimal places.
$ million
2.
What
are your forecasts of the company’s year-end inventory turnover ratio? Round
your answer to two decimal places.
Problem 17-14
Excess capacity
Krogh Lumber’s 2012 financial statements are
shown here.
Krogh
Lumber: Balance Sheet as of December 31, 2012 (Thousands of Dollars)
Cash
$1,800
Accounts payable
$7,200
Receivables
10,800
Notes payable
3,472
Inventories
12,600
Accrued liabilities
2,520
Total current assets
$25,200
Total current liabilities
$13,192
Mortgage bonds
5,000
Net fixed assets
21,600
Common stock
2,000
Retained earnings
26,608
Total assets
$46,800
Total liabilities and equity
$46,800
Krogh
Lumber: Income Statement for December 31, 2012 (Thousands of Dollars)
Sales
$36,000
Operating costs including
depreciation
30,783
Earnings before interest and taxes
$5,217
Interest
1,017
Earnings before taxes
$4,200
Taxes (40%)
1,680
Net income
$2,520
Dividends (60%)
$1,512
Addition to retained earnings
$1,008
Assume that the company was operating at full capacity
in 2012 with regard to all items except fixed assets; fixed assets in 2012
were being utilized to only 76% of capacity. By what percentage could 2013
sales increase over 2012 sales without the need for an increase in fixed
assets? Round your answer to two decimal places.
%
Now
suppose 2013 sales increase by 20% over 2012 sales. Assume that Krogh
cannot sell any fixed assets. All assets other than fixed assets will grow
at the same rate as sales; however, after reviewing industry averages, the
firm would like to reduce its Operating costs/Sales ratio to 85% and
increase its debt-to-assets ratio to 42%. The firm will maintain its 60%
dividend payout ratio, and it currently has 1 million shares outstanding.
The firm plans to raise 35% of its 2013 total debt as notes payable, and
it will issue bonds for the remainder. Its before-tax cost of debt is 10%.
Any stock issuances or repurchases will be made at the firm’s current
stock price of $40. Develop Krogh’s projected financial statements. What
are the balances of notes payable, bonds, common stock, and retained
earnings? Round your answers to the nearest hundredth of thousand of
dollars.
Krogh
Lumber Pro Forma Income Statement December 31, 2013 (Thousands of Dollars)
2012
2013
Sales
$36,000
$
Operating costs (includes
depreciation)
30,783
$
EBIT
$5,217
$
Interest expense
1,017
$
EBT
$4,200
$
Taxes (40%)
1,680
$
Net Income
$2,520
$
Dividends
$1,512
$
Addition to RE
$1,008
$
Krogh
Lumber Pro Forma Balance Statement December 31, 2013 (Thousands of Dollars)
2012
2013
Cash
$1,800
$
Accounts receivable
10,800
$
Inventories
12,600
$
Fixed assets
21,600
$
Total assets
$46,800
$
Payables + accruals
$9,720
$
Short-term bank loans
3,472
$
Total current liabilities
$13,192
$
Long-term bonds
5,000
$
Total debt
$18,192
$
Common stock
2,000
$
Retained earnings
26,608
$
Total common equity
$28,608
$
Total liab. and equity
$46,800
$
