Question

Suppose that the 2017 actual and 2018 projected financial statements for Cramner Corp. are initially as shown in the following tables. In these tables, sales are projected to rise 35 percent in the coming year, and the components of the income statement and balance sheet that are expected to increase at the same 35 percent rate as sales are indicated with an italics font. Assuming that Cramner Corp. wants to cover the AFN with 45 percent equity, 25 percent long-term debt, and the remainder from notes payable, what amount of additional funds will they need to raise if debt carries an 8 percent interest rate?

Income Statement
	2017 Actual			2018 Forecast
Sales	$	3,000,000		$	4,050,000
Costs except depreciation		1,000,000			1,350,000
Depreciation		1,500,000			2,025,000
EBIT	$	500,000		$	675,000
Less Interest		80,000			126,772
EBT	$	420,000		$	548,228
Taxes (40%)		168,000			219,291
Net income	$	252,000		$	328,937
Common Dividends	$	180,000		$	180,000
Addition to Retained Earnings	$	72,000		$	148,937

  

Balance Sheet
	2017 Actual			2018 Forecast
Assets
Cash	$	100,000		$	135,000
Accounts Receivable		200,000			270,000
Inventories		300,000			405,000
Total Current Assets	$	600,000		$	810,000
Net Plant and Equipment		4,000,000			5,400,000
Total Assets	$	4,600,000		$	6,210,000
Liabilities and Equity
Accounts Payable	$	100,000		$	135,000
Notes Payable		500,000			675,000
Accruals		100,000			135,000
Total Current Liabilities	$	700,000		$	945,000
Long-term bonds		500,000			675,000
Total Debt	$	1,200,000		$	1,620,000
Common Stock	$	3,000,000		$	4,050,000
Retained Earnings		400,000			540,000
Total Common Equity	$	3,400,000		$	4,590,000
Total Liabilities and Equity	$	4,600,000		$	6,210,000

Answer 1

The necessary increase in assets from 2017 to 2018 is (62,10,000- 46,00,000)=16,10,000

Spontaneous increase in Liabilities other than common stock, long term bonds & notes payable= (2,70,000- 2,00,000)= 70,000

Projected increase in Retained earnings= (540000- 4,00,000) = 1,40,000

Additional Funds Needed= 16,10,000-70,000-1,40,000= 14,00,000

So,Cramner Corp. wants to cover the AFN with 45 percent equity, 25 percent long-term debt, and the remainder from notes payable that is 30 percent. The projected figures would be:-

Notes payable = 5,00,000 + 14,00,000 * 30% = 9,20,000

Long term Debt = 5,00,000 + 14,00,000 * 25% =8,50,000

Common Stock = 30,00,000 + 14,00,000* 45% =36,30,000

Change in Notes payable, LT debt, Common Stock = 14,00,000

The 2018 forecast of Income statement would be as follows:-

Sales				$	4,050,000
Costs except depreciation					1,350,000
Depreciation					2,025,000
EBIT				$	675,000
Less Interest					141600
EBT				$	533400
Taxes (40%)( approx. to nearest hundred)					213400
Net income				$	320000
Common Dividends				$	180,000
Addition to Retained Earnings				$	1,40,000

In the above table, the interest is calculated on the amount of Notes payable and Long term Debt calculated above at the rate of 8 percent as given in the question.

(920,000 + 8,50,000) * 8% = 1,41,600