Question

EXCESS CAPACITY Krogh Lumber's 2016 financial statements are shown here. Krogh Lumber: Balance Sheet as of December 31, 2016 (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, 2016 (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 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 76% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places. % Now suppose 2017 sales increase by 25% over 2016 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 total liabilities-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 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11.5%. 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, 2017 (Thousands of Dollars) 2016 2017 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, 2017 (Thousands of Dollars) 2016 2017 Assets Cash $1,800 $ Accounts receivable 10,800 Inventories 12,600 Fixed assets 21,600 Total assets $46,800 $ Liabilities and Equity Payables + accruals $9,720 $ Short-term bank loans 3,472   Total current liabilities $13,192 $ Long-term bonds 5,000   Total liabilities $18,192 $ Common stock 2,000 Retained earnings 26,608   Total common equity $28,608 $ Total liab. and equity $46,800 $

Answer 1

(All fig. in ' 000 s of $)

1.Percentage sales could increase in 2017 over 2016 sales without the need for an increase in fixed assets:

Fixed assets utilisation in 2016 = 76%

Sales in 2016= 36000

So Full capacity sales=36000/76%*100%=

47368.42

Sales can be increased by $ 47368.42-36000=

11368.42

without the need for an increase in fixed assets

% increase over 2016 sales=11368.42/36000=

31.58%

Krogh Lumber Pro Forma Income Statement December 31, 2017 ('000s of $)
	2016	2017
Sales	36000	36000*1.25=	45000
Operating costs (incl.depn.)	30783	45000*85%=	38250
EBIT	5217		6750
Interest expense	1017	(4060+6092)*11.5%=	1167
EBT	4200		5583
Taxes (40%)	1680	5583*40%=	2233
Net Income	2520		3350
Dividends(60%*net income)	1512		2010
Addition to RE(40%*net inc.)	1008		1340
Krogh Lumber Pro Forma Balance Statement December 31, 2017 ('000s of $)
	2016	2017
Assets
Cash	1800	1800*1.25=	2250
Accounts receivable	10800	10800*1.25=	13500
Inventories	12600	12600*1.25=	15750
Fixed assets	21600		21600
Total assets	46800		53100
Liabilities and Equity
Payables + accruals	9720	9720*1.25=	12150
Short-term bank loans	3472	3472+588=	4060
Total current liabilities	13192		16210
Long-term bonds	5000	5000+1092=	6092
Total liabilities	18192		22302
Common stock	2000	53100-22302-27948=	2850
Retained earnings	26608	26608+1340=	27948
Total common equity	28608		30798
Total liab. and equity	46800		53100

WORKINGS for 2017 forecast
Total assets	53100
So, total liabilities(53100*42%)=	22302
Amt. to be raised
22302-3472-5000-12150=	1680
Of which
Notes payable=35%*1680=	588
Bonds=bal.,ie. 1680-588=	1092
So
Total interest bearing loans
3472+588+5000+1092=	10152
Interest expense on loans(10152*11.5%)=	1167
ANSWERS:
Balances of
Notes payable	4060
Bonds	6092
Common stock	2850
Retained earnings	27948