Question

The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current assets, fixed assets, and accounts payable increase spontaneously with sales.

MOOSE TOURS, INC. 2015 Income Statement
Sales				$	758,000
Costs					593,000
Other expenses					14,000
Earnings before interest and taxes				$	151,000
Interest expense					10,000
Taxable income				$	141,000
Taxes (40%)					56,400
Net income				$	84,600
Dividends	$	33,840
Addition to retained earnings		50,760

  

MOOSE TOURS, INC. Balance Sheet as of December 31, 2015
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	21,740		Accounts payable	$	55,900
Accounts receivable		34,060		Notes payable		15,100
Inventory		71,020
				Total	$	71,000
Total	$	126,820		Long-term debt	$	102,000
Fixed assets				Owners’ equity
Net plant and equipment	$	275,000		Common stock and paid-in surplus	$	102,000
				Retained earnings		126,820
				Total	$	228,820
Total assets	$	401,820		Total liabilities and owners’ equity	$	401,820

   

What is the EFN if the firm was operating at only 80 percent of capacity in 2015? Assume that fixed assets are sold so that the company has a 100 percent asset utilization. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

EFN

$

Answer 1

Sales	909600
Costs	711600
Other expenses	16800
Earnings before interest and taxes	181200
Interest expense	10000
Taxable income	171200
Taxes (40%0	68480
Net Income	102720

Dividend = 33840/84600* 102720 = 41088

And the addition to retained earnings will be:

Addition to retained earnings = $102,720 – 41,088

Addition to retained earnings = $61,632

The new retained earnings on the pro forma balance sheet will be:

New retained earnings = $126,820 + 61,632

New retained earnings = $188452

MOOSE TOURS, INC.
Pro Forma Balance Sheet
Assets				Liabilities and Owners’ Equity
Current assets				Current liabilities
Cash	$	26,088		Accounts payable	$	67,080
Accounts receivable		40,872		Notes payable		15,100
Inventory		85,224
				Total	$	82,180
Total	$	1,52,184		Long-term debt	$	1,02,000
Fixed assets				Owners’ equity
Net plant and equipment	$	3,30,000		Common stock and paid-in surplus	$	1,02,000
				Retained earnings		1,88,452
				Total	$	3,92,452
Total assets	$	4,82,184		Total liabilities and owners’ equity	$	4,74,632

    

Full capacity sales = $758,000/ 0.80

Full capacity sales = $947,500

The full capacity ratio at full capacity sales is:

Full capacity ratio = Fixed assets / Full capacity sales

Full capacity ratio = $275,000 / $947,500

Full capacity ratio = 0.290237

The fixed assets required at full capacity sales is the capital ratio times the projected sales level:

Total fixed assets = .290237($909,600) = $264,000

So, EFN is:

EFN = ($1,52,184 + 264,000) – $4,74,632 = –$58,448