Question

The Haverly Company expects to finish the current year with the following financial results, and is developing its annual plan for next year.

Haverly Company Income Statement This Year ($000)
	$		%
Revenue	$74920		100.0
COGS	26984		36
Gross Margin	$47936		64
Expenses:
Marketing	$11605		15.5
Engineering	9314		12.4
Fin & Admin	8106		10.8
Total Exp.	$29025		38.7
EBIT	$18911		25.2
Interest	2255		3
EBT	$16656		22.2
Inc Tax	6996		9.3
Net Income	$  9660		12.9

Haverly Company Balance Sheet This Year ($000)
ASSETS			LIABILITIES & EQUITY
Cash	$   9753		Accounts payable	$   1499
Accounts receivable	12487		Accruals	553
Inventory	6746
Current assets	$28986		Current liabilities	$   2052
			Long-term debt	$27264
Fixed Assets			Equity
Gross	$51345		Stock accounts	$12084
Accumulated depreciation	(23758)		Retained earnings	15173
Net	$27587		Total Equity	$27257
Total assets	$56573		Total L&E	$56573

The following facts are available.

• Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 40% purchased material.
• Currently owned assets will depreciate an additional $1100000 next year.
• There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $31 million is expected to grow by 11% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been received. This materials accrual is generally about 9% of the payables balance at year end.
• The combined state and federal income tax rate is 42%.
• Interest on current and future borrowing will be at a rate of 14%.

PLANNING ASSUMPTIONS

Income Statement Items

1. Revenue will grow by 13% with no change in product mix. Competitive pressure, however, is expected to force some reductions in pricing.
2. The pressure on prices will result in a 2% deterioration (increase) in the next year's cost ratio.
3. Spending in the marketing department is considered excessive and will be held to 10% of revenue next year.
4. Because of a major development project, expenses in the engineering department will increase by 15%.
5. Finance and administration expenses will increase by 8%.

Assets and Liabilities

6. An enhanced cash management system will reduce cash balances by 5%.
7. The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.)
8. The inventory turnover ratio (COGS/inventory) will decrease by 0.5x.
9. Capital spending is expected to be $7 million. The average depreciation life of the assets to be acquired is five years. The firm uses straight-line depreciation, and takes a half year in the first year.
10. Bills are currently paid in 50 days. Plans are to shorten that to 30 days.
11. A dividend totaling $2 million will be paid next year. No new stock will be sold.

Develop next year's financial plan for Haverly on the basis of these assumptions and last year's financial statements. Include a projected income statement, balance sheet and a statement of cash flows. Enter your dollar answers in thousands. For example, an answer of $200 thousands should be entered as 200, not 200000. Round dollar answers and intermediate calculations to the nearest thousand. Round the percentage values to 1 decimal place. Enter all amounts in Income Statement as a positive numbers. Use a minus sign, to indicate a negative cash outflow, or a decrease in cash in Balance Sheet and Cash Flow Statement.

HAVERLY COMPANY INCOME STATEMENTS ($000)
	THIS YEAR		NEXT YEAR
	$	%	$	%
Revenue	$74920	100.0	$	100.0
COGS	26984	36		%
Gross Margin	$47936	64	$	%
Expenses:
Marketing	$11605	15.5	$	%
Engineering	9314	12.4		%
Fin & Admin	8106	10.8		%
Total Exp.	$29025	38.7	$	%
EBIT	$18911	25.2	$	%
Interest	2255	3		%
EBT	$16656	22.2	$	%
Inc Tax	6996	9.3		%
Net Income	$  9660	12.9	$	%

HAVERLY COMPANY BALANCE SHEETS ($000)
ASSETS				LIABILITIES & EQUITY
	THIS YR	NEXT YR			THIS YR	NEXT YR
Cash	$   9753	$		Accts. Pay.	$   1499	$
Accts. Rec.	12487			Accruals	553
Inventory	6746
Curr. Assets	$28986	$		Curr. Liab.	$   2052	$
				Long Term Debt	$27264	$
Fixed Assets				Equity
Gross	$51345	$		Stock Accts	$12084	$
Accum. Depr.	(23758)			Retained Earn	15173
Net	$27587	$		Total Equity	$27257	$
Total Assets	$56573	$		Total L & E	$56573	$

HAVERLY COMPANY CHANGES IN WORKING CAPITAL NEXT YEAR ($000)
	A/R	$
	Inventory	$
	A/P	$
	Accruals	$
		$
HAVERLY COMPANY STATEMENT OF CASH FLOWS NEXT YEAR ($000)
OPERATING ACTIVITIES
	Net Income	$
	Depreciation
	Increase in W/C
Cash Flow From Operating Activities		$
INVESTING ACTIVITIES
Increase in Gross Fixed Assets		$
FINANCING ACTIVITIES
	Decrease in Debt	$
	Dividend	$
		$
NET CASH FLOW		$
RECONCILIATION
	Beginning Cash	$
	Net Cash Flow	$
	Ending Cash	$

Answer 1