Question

Problem 9-7
Forecasted Statements and Ratios

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2015, is shown here (millions of dollars):

Cash	$   3.5		Accounts payable	$   9.0
Receivables	26.0		Notes payable	18.0
Inventories	58.0		Line of credit	0
Total current assets	$ 87.5		Accruals	8.5
Net fixed assets	35.0		Total current liabilities	$ 35.5
			Mortgage loan	6.0
			Common stock	15.0
			Retained earnings	66.0
Total assets	$122.5		Total liabilities and equity	$122.5

Sales for 2015 were $375 million and net income for the year was $11.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.5 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio remain constant in 2016. Do not round intermediate calculations.

1. If sales are projected to increase by $40 million, or 10.67%, during 2016, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $ ____million
   
2. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
   _____%
   
3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2016. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
   Assume Upton's profit margin and dividend payout ratio will be the same in 2016 as they were in 2015. What is the amount of the line of credit reported on the 2016 forecasted balance sheets? (Hint: You don't need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2016 addition to retained earnings for the balance sheet.) Round your answers to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.

   Upton Computers Pro Forma Balance Sheet December 31, 2016 (Millions of Dollars)
   Cash	$____
   Receivables	$  ____
   Inventories	$  ____
   Total current assets	$  ____
   Net fixed assets	$  ____
   Total assets	$  ____
   Accounts payable	$  ____
   Notes payable	$  ____
   Accruals	$  ____
   Total current liabilities	$  ____
   Mortgage loan	$  ____
   Common stock	$  ____
   Retained earnings	$  ____
   Total liabilities and equity	$  ____

answer all the blanks ____  and plz show your steps

Answer 1

a.AFN=Required increase in total assets-Spontaneous increase in liabilities-Increase in Retained earnings

AFN=(2015 total assets*10.67%)-(2015 sp.liab.*10.67%)-(2016 sales*PM*(1-Div.P/O)

ie.AFN=(122.5*0.1067)-(17.5*0.1067)-(415*3%*(1-40%))

3.73

millions

Spontaneous liabilities= Accounts payable+Accruals=9=8.5=17.5

Sales=375+40=415

b.Maximum growth rate the firm can achieve without having to employ nonspontaneous external funds

ie. AFN=0

so, 0=(122.5*x)-(17.5*x)-((375*(1+x))*3%*(1-40%))

Solving for x, we get the required % increase as,

6.87%

Upton Computers
Pro Forma Balance Sheet
31-Dec-16
(Millions of Dollars)
Cash (3.5*1.1067)	3.87
Receivables(26*1.1067)	28.77
Inventories(58*1.1067)	64.19
Total current assets	96.84
Net fixed assets(35*1.1067)	38.73
Total assets	135.57
Liabilities & equity
Accounts payable(9*1.1067)	9.96
Notes payable(not a spontaneous liab.)	18.00
Accruals(8.5*1.1067)	9.41
Total current liabilities	37.37
Mortgage loan	6.00
Common stock	15.00
Retained earnings (66+(415*3%*(1-40%)))	73.47
Total liabilities and equity	131.84
AFN=Line of credit (135.57-131.84)(Bal.fig.)	3.73
Total	135.57