Question

The following tables summarizes the 2019 income statement and end-year balance sheet of Drake’s Bowling Alleys. Drake’s financial manager forecasts a 15% increase in sales and costs in 2020. The ratio of sales to average assets is expected to remain at 0.40. Interest is forecasted at 3% of debt at the start of the year.

INCOME STATEMENT, 2019
(Figures in $ thousands)
Sales	$	1,080		(40% of average assets)a
Costs		540		(50% of sales)
Interest		26		(5% of debt at start of year)b
Pretax profit	$	514
Tax		103		(20% of pretax profit)
Net income	$	411

^a Assets at the end of 2018 were $2,600,000.

^b Debt at the end of 2018 was $520,000.

BALANCE SHEET, YEAR-END
(Figures in $ thousands)
Assets		$	2,800				Debt	$	520
							Equity		2,280
Total		$	2,800					$	2,800

a. What is the implied level of assets at the end of 2020? (Do not round your intermediate calculations. Enter your answer in thousands.)

b. If the company pays out 50% of net income as dividends, how much cash will Drake's need to raise in the capital markets in 2020? (Do not round your intermediate calculations. Enter your answer in thousands.)

c. If Drake's is unwilling to make an equity issue, what will be the debt ratio at the end of 2020? (Do not round your intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Income Statement	2019	Change	Change Amount	2020
Sales	1080	15%	162	1242
Cost	540	15%	81	621
Interest	26			15.6	(520*3%)
Pretax Profit	514			605.4
Tax	103			121.08	(605*20%)
Net Income	411			484.32
2019
Asset	2800	Debt	520
		Equity	2280
Total	2800	Total	2800
SOLUTION a
Asset
where Opening asset is 2800
Closing Asset be x
Sales =		1242=	0.4
Average Asset		(2800+X)/2
		1242=	0.4{(2800+x)/2}
		1242=	0.4(1400+0.5X)
		1242=	560+0.2X
		1242-560=	0.2X
		682=	0,2X
		x=3410
Solution b
If company pays 50% of net income as dividend, it needs 484.32*0.5= 242.16 cash
Solution c
Debt Ratio formula =		Total Debt
		Total Assets
If company raises above required cash through debt, Total debt = 520+242.16= 762.16
asset as calculated above 3410
therefore Debt ratio in the end of 2020 will be 762.16/3410*100= 22.35%