Question

Morrissey Technologies Inc.'s 2019 financial statements are shown here. Morrissey Technologies Inc.: Balance Sheet as of December 31, 2019 Cash $180,000 Accounts payable $360,000 Receivables 360,000 Notes payable 56,000 Inventories 720,000 Accrued liabilities 180,000 Total current assets $1,260,000 Total current liabilities $596,000 Long-term debt 100,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000 Morrissey Technologies Inc.: Income Statement for December 31, 2019 Sales $3,600,000 Operating costs including depreciation 3,279,720 EBIT $320,280 Interest 20,280 EBT $300,000 Taxes (25%) 75,000 Net Income $225,000 Per Share Data: Common stock price $45.00 Earnings per share (EPS) $2.25 Dividends per share (DPS) $1.35 Suppose that in 2020, sales increase by 20% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 85% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2020 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12.5%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45. Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Do not round intermediate calculations. Round your answers to the nearest cent. Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2020 2019 2020 Sales $3,600,000 $   Operating costs (includes depreciation) 3,279,720 EBIT $320,280 $   Interest expense 20,280 EBT $300,000 $   Taxes (25%) 75,000 Net Income $225,000 $   Dividends (60%) $   $   Addition to retained earnings $   $   Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2020 2019 2020 Assets Cash $180,000 $   Accounts receivable 360,000 Inventories 720,000 Fixed assets 1,440,000 Total assets $2,700,000 $   Liabilities and Equity Payables + accruals $540,000 $   Short-term bank loans 56,000   Total current liabilities $596,000 $   Long-term bonds 100,000   Total liabilities $696,000 $   Common stock 1,800,000 Retained earnings 204,000   Total common equity $2,004,000 $   Total liabilities and equity $2,700,000 $   If the profit margin remains at 6.25% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In other words, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Do not round intermediate calculations. Round your answer to two decimal places. ______ %

Answer 1

(a)
Forecasted Income Statement for Dec. 31, 2020
	$	$
	2020	2019
Sales Revenue	43,20,000	36,00,000		3600000*120%
Operating cost inc. Dep.	36,72,000	32,79,720
EBITD	6,48,000	3,20,280
Interest	54,000	20,280
EBT	5,94,000	3,00,000
Taxes (25%)	1,48,500	75,000		594000*25%
Net Income	4,45,500	2,25,000
Per Share Data:
Common stock price	45	45
EPS	4.46	2.25
Dividend per share (DPS)	2.67	1.35
Dividend (Net Income x DPR)	2,67,300	1,35,000
Dividend Payout Ratio (Dividend / Net income)	0.6	0.6
Forecasted Balance Sheet as on Dec. 31, 2020
Assets	2020	2019	Equity and Liabilities	2020	2019
Cash	2,16,000	1,80,000	Accounts Payable	3,60,000	3,60,000
Receivables	4,32,000	3,60,000	Notes Payable	72,800	56,000
Inventories	8,64,000	7,20,000	Accrued Liabilities	1,80,000	1,80,000
Total current assets	15,12,000	12,60,000	Total current liabilities	6,12,800	5,96,000
Fixed Assets	17,28,000	14,40,000	Long term debt	3,59,200	1,00,000
			Common Stock	18,85,800	18,00,000
			Retained Earning	3,82,200	2,04,000
Total	32,40,000	27,00,000	Total	32,40,000	27,00,000
Note:				-
(1) Assets are estimated in same ratio of sales as in last year. For example,
Cash to sales ratio in 2019 (180000/3600000*100 )			5.00%
So Cash for 2020 is ( 4320000*5%) =		2,16,000	$
Receivable to sales ratio in 2019 (360000/3600000*100 ) = 10%
So receivable for 2020 is ( 4320000*10%) = $ 4,32,000
Inventory to sales ratio in 2019 (720000/3600000*100 ) = 20%
So inventory for 2020 is ( 4320000*20%) = $ 8,64,000
Fixed assets to sales ratio in 2019 (144000/3600000*100 ) = 40%
So inventory for 2020 is ( 4320000*40%) = $ 17,28,000
(2) Operating cost for 2020 ( 43,20,000 * 85%) =			36,72,000	$
(3) Total Liability for 2020 ( 3240000 * 30%) =			9,72,000	$
Liability increased during 2020 (972000 - 596000 - 100000) =        2,76,000	$
Notes payable for 2020 shall be ( 56000*130%) =                                 72,800	$
Long term bond (100000+ (276000-72800+56000) =                              3,59,200	$
and other liabilities shall be remains same.
(4) Interest expenses for 2020 (72800 + 359200)* 12.5%    = $		54,000
(5) Dividend paid
(6) Retained Earning as on Dec 31, 2020 (204000 + 445500 -267300)	3,82,200	$
(7) Any difference adjusted as new share issued and it is assumed that new share issued on last date
of the year and dividend is paid before considering that.	This part solved