Question

Income Statement
Year			2019	2020
Net Revenue			140,000
- Cost of Goods Sold			70,000
- Depreciation Expense			9,000
EBIT			61,000
- Interest Expense			10,500
Income Before Taxes			50,500
Tax Expense			10,605
Net Income 2019 Dividend			39,895     9,974
	Balance Sheet
Year (end of)		2019		2020								2019	2020
Assets							Liabilities
Current Assets							Current Liabilities
Cash and Equivalents		10,000					Accounts Payable					21,000
Accounts Receivable		25,000					Long-term Debt					95,000
Inventory		12,000					Total Liabilities					116,000
Fixed Assets, Net		165,000					Stockholders' Equity
Total Assets		212,000					Common Stock					44,000
							Retained Earnings					52,000
							Total Stockholders Equity					96,000

Sales will grow by 10% in 2020. All costs, assets, and current liabilities vary directly with sales. Interest Exp., Common Stock, Tax Rate and Div. payout ratio are constant. L-T Debt=Plug number.

A. Prepare a 2020 forecast. What is the 2020 Dividend and Addition to Retained Earnings?

B. If a bank will allow Atlantic to borrow 2.5 times prior year EBITDA, how much total Long-Term Debt would the bank allow in 2020?

C. What is Atlantic’s Days Accounts Payables in 2020? By how many Days would A/P need to increase to balance the Balance Sheet if Long-Term Debt = $70,000?

Answer 1

Answer :

Income statement

Year	2019	2020
Net Revenue	140000	154000	Increase by 10%
Cost of goods sold	70000	77000	Increase by 10%
Depreciation expense	9000	9900	Increase by 10%
EBIT	61000	67100	-
Interest Expense	10500	10500	(Remains same as given in question)
Income before taxes	50500	56600	-
Tax expense	10605	11886	Tax rate = (10605/50500)*100 = 21%
Net income	39895	44714	-
2019 Dividend	9974	11179	-

Balance Sheet

Assets	2019	2020	Liabilities	2019	2020
Current Assets	-	-	Current Liabilities	-	-
Cash and cash equivalents	10000	11000	Accounts payable	21000	23100
Accounts Receivable	25000	27500	Long -term debt	95000	80565
Inventory	12000	13200	Total Liabilities	116000	103665
Fixed Assets, Net	165000	181500	Stockholder's Equity	-	-
Total Assets	212000	233200	Common stock	44000	44000
			Retained earnigs	52000	85535
			Total stock holder's equity	96000	129535
			Total of equity and liabilities	212000	233200

Question states that the dividends payour ratio remains same

So, we have the current payour ratio = Dividend/Earnings = 9974/39895 = 0.25

So, we can get the dividend for this year = 44714*0.25 = 11179

Addition to retained earnings = 44714 - 11179 = 33535

(1B) EBITDA is Earnigns before interest tax depreciation and Amortization

so to compute the prior year EBITDA, we have

EBIT	61000
Add Back depreciation	9000
EBITDA	70000
Allowable long term debt = EBITDA*2.5	175000

(1C). Accounts payable = 21000*1.10 = 23100

Balance Sheet if the Long term debt is 70000, the balance in accounts payable = 67200

Assets	2019	2020	Liabilities	2019	2020
Curretn assets			Current Liabilities	-	-
Cash ans Cash equivalents	10000	11000	Accounts payable	21000	67200
Accounts Receivable	25000	27500	Long term debt	95000	70000
Inventory	12000	13200	Total liabilities	116000	137200
Fixed Assets Net	165000	181500	Stockholder's equity	-	-
Total Assets	212000	233200	Common stock	44000	44000
			Retained earnings	52000	52000
			Total stock holder's equity	96000	96000
			Total of equity and liabilities	212000	233200

We have days payable outstanding = (Accounts payable / cost of goods sold in accounting perios)* days in accounting period

Days payable outstanding when accounts payable = 23100

Estimated cost of goods sold for year 2020 = 77000

Days payable outstanding = (23100/77000)*366 = 110

Days payable outstnding when accounts payable = 67200

Estimated cost of goods sold for year 2020 = 77000

Days payable outstanding = (67200/77000)*366 = 319

Difference in DPO = 319 - 110 = 209 days