Question

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, 2019, 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 2019 were $350 million and net income for the year was $10.5 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate was 25%, 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 2020. Do not round intermediate calculations.

A. If sales are projected to increase by $87.5 million, or 25%, during 2020, use the AFN equation to determine Upton's projected external capital requirements. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. $ million

B. 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. %

C. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2020. 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 2020 as they were in 2019. What is the amount of the line of credit reported on the 2020 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2020 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.

Upton Computers Pro Forma Balance Sheet December 31, 2020 (Millions of Dollars)

Cash ___$

Receivables ___$

Inventories ___$

Total current assets___ $

Net fixed assets___ $

Total assets ___$

Accounts payable ___$

Notes payable___ $

Line of credit___ $

Accruals ___$

Total current liabilities___ $

Mortgage loan___ $

Common stock ___$

Retained earnings___ $

Total liabilities and equity___ $

Answer 1

1) Additional Funds Needed or AFN can be calculated as below:

AFN = (Total Assets / Previous year sales) x Change in Sale - (Liabilities affected by sales / Previous year sales) x Change in Sale - (Projected net income x Retention ratio) ----- (a)

According to given data in question

Total Assets= $122.5 million

Change in Sales = $87.5

Liabilities affected by sales = Accounts payable + Accruals

                                            = $9.0 + $8.5

                                            = $17.5

Previous year sales = $350

Projected net income = Sales for 2019 + Increase projected sales

                                          = $350 + $87.5

                                  = $437.5

Retention Ratio = Profit Margin * (1 - Payout Ratio)

                          = 0.03 * (1 – 0.4)

Putting the above values in equation (a)

AFN = ($122.5 / $350) x $87.5 – ($17.5 / $350) x $87.5 – ($437.5 x 0.030 x 0.60)

        = $0.35 x 87.5 – (0.05 x $87.5) – ($7.875)

        = $30.625 – $4.375 – $7.875

        = $18.375

AFN = $18.375 million

2) Growth rate

For the firm to have maximum growth rate without having to employ nonspontaneous external funds

AFN = 0

AFN = (Total Assets x g) - (Liabilities affected by sales x g ) - Previous year sales ( 1 +g) x 0.3 x 0.60

=> 0 = ($122.5 x g) – ($17.5 x g) – (($350 (1 + g) x 0.3 x 0.60)

=> 122.5g – 17.5g – (6.3(1 + g)) = 0

=> 105g - 6.3 – 6.3g = 0

=> g = 0.0638298

=> g = 6.38 %

Growth rate = 6.38 %

3) Proforma Balance Sheet for Upton Computer :

As sales are projected to increase by 25%, So

Cash 4.375 Million                 [Last year Cash * (1 + 0.25) = 3.5 * 1.25]

Receivable                   32.5 Million                  [Last year Receivable * (1 + 0.25) = 26.0 * 1.25]

Inventories 72.5 Million                   [Last year Inventories * (1 + 0.25) = 58.0 * 1.25]

Total Current Assets 109.375Million             [Cash + Receivable + Inventories]

Net Fixed Assets 43.75 Million                [Last year Net Fixed Assets * (1 + 0.25) = 35.0 * 1.25]

Total Assets 153.125 Million            [Total Current Assets + Net Fixed Assets]

Line of Credit (AFN) 18.375 Million              [Calculated in part 1]

Notes Payable                   18.0 Million

Accounts Payable 11.25 Million               [Last year Accounts Payable * (1 + 0.25) = 9.0 * 1.25]

Accruals 10.625 Million            [Last year Accruals * (1 + 0.25) = 8.5 * 1.25]

Total Current Liabilities    58.25 Million              [Line of Credit + Notes Payable + Accounts Payable + Accruals]

Mortgage Loan 6 Million          

Common Stock 15 Million                  

Retained Earning 73.875 Million

[Last year Retained Earning + (Current Sales *Profit Margin* (1- payout ratio) = 437.5 * 0.03 * 0.6)]

Total Current Liabilities & Equity --- 153.125 Million