Question

Cholesterol Dairy Products has plants in five provinces and operates a very large home delivery service. Sales last year were $100 million, and the balance sheet at year-end is similar in percent of sales to that of previous years (and this will continue in the future). All assets and current liabilities will vary directly with sales. Assume the firm is already using capital assets at full capacity. Balance Sheet (in $ millions) Assets Liabilities and Shareholders' Equity Cash $5 Accounts payable $7 Accounts receivable 11 Accrued wages 6 Inventory 22 Accrued taxes 5 Current assets $38 Current liabilities $18 Capital assets 38 Long-term debt 15 Common stock 20 Retained earnings 23 Total assets $76 Total liabilities and shareholder's equity $76 The firm has an aftertax profit margin of 6 percent and a dividend payout ratio of 20 percent. a. If sales grow by 15 percent next year, determine how many dollars of new funds are needed to finance the expansion. (Enter the answer in millions. Round the final answer to 3 decimal places.) The firm needs $ million in external funds. b. Prepare a pro forma balance sheet with any financing adjustment made to long term debt. (Input all answers as positive values. Be sure to list the assets and liabilities in order of their liquidity. Enter the answers in millions. Round the final answers to 3 decimal places.) Balance Sheet ($ millions) Assets Liabilities and Shareholders' Equity Current assets Current liabilities $ $ Current assets $ Current liabilities $ $ Total assets $ Total liabilities and shareholders' equity $ c. Calculate the current ratio and total debt to assets ratio for each year. (Round the final answers to 2 decimal places.) Year 1 Year 2 Current ratio X X Total debt / assets % %

Answer 1

The value of RNF is calculated as follows:

Required New Funds = Total Assets/Total Sales*(Change in Sales) - Total Liabilities/Total Sales*(Change in Sales) -Profit Margin*New Sales*(1-Dividend Payout Ratio)

Where Total Assets = Spontaneous Assets = Current Assets + Fixed Assets

Total Liabilities = Spontaneous Liabilities = Accounts Payable + Accrued Wages + Accrued Taxes

_____

Using the values provided in the question, we get,

Spontaneous Assets = 38 + 38 = $76

Spontaneous Liabilities = 7 + 6 + 5 = $18

Sales = $100

Change in Sales = 100*15% = $15

Required New Funds = 76/100*(15,000,000) - 18/100*(15,000,000) - 6%*115,000,000*(1-20%) = $3,180,000 or $3.18 million

______

Part B)

The proforma balance sheet is given as follows:

Balance Sheet
in Millions ($)
Assets
Cash [(5*(1+15%)]	$                    5.75
AR [(11*(1+15%)]	$                  12.65
Inventory [(22*(1+15%)]	$                  25.30
Current Assets	$                  43.70
Capital Assets [(38*(1+15%)]	$                  43.70
Total Assets	$                  87.40
Liabilities and Shareholders' Equity
Accounts Payable [(7*(1+15%)]	$                    8.05
Accrued Wages [(6*(1+15%)]	$                    6.90
Accrued Taxes [(5*(1+15%)]	$                    5.75
Current Liabilities	$                  20.70
Long Term Debt (15 + 3.18)	$                  18.18
Common Stock	$                  20.00
Retained Earnings [23 + 6%*115*(1-20%)]	$                  28.52
Total Liabilities and Shareholder's Equity	$                  87.40

______

Part C)

The formula for calculating current ratio and debt to total assets ratio are given below:

Current Ratio = Current Assets/Current Liabilities

Debt to Total Assets Ratio = Total Debt/Total Assets

____

Year 1

Current Ratio = 38/18 = 2.11

Debt to Total Assets Ratio = (15 + 18)/76 = 0.4342

____

Year 2

Current Ratio = 43.70/20.70 = 2.11

Debt to Total Assets Ratio = (20.70 + 18.18)/87.40 = 0.44