Problem 17-8Long-term financing neededAt 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 17-9Sales increasePierce 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 17-11Regression and inventoriesCharlie’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 17-14Excess capacityKrogh 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 $7,200Receivables 10,800 Notes payable 3,472Inventories 12,600 Accrued liabilities 2,520Total current assets $25,200 Total current liabilities $13,192 Mortgage bonds 5,000Net fixed assets 21,600 Common stock 2,000 Retained earnings 26,608Total 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
a. 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. %
b. 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 2013Sales $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 $
c. Krogh Lumber Pro Forma Balance Statement December 31, 2013 (Thousands of Dollars) 2012 2013Cash $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 $
