Question

Clyde’s Well Servicing has the following financial statements. The balance sheet items, profit margin, and dividend payout have maintained the same relationships the past couple of years; these relationships are anticipated to hold in the future. Clyde’s has excess capacity, so there is no expected increase in capital assets.

Income Statement
Sales	$2,000,000
Cost of goods sold	1,260,000
Gross profit	740,000
Selling and administrative expense	400,000
Amortization	55,000
Earnings before interest and taxes	285,000
Interest	50,000
Earnings before taxes	235,000
Taxes	61,000
Earnings available to common shareholders	$174,000
Dividends paid	$104,000

   

Balance Sheet
Assets		Liabilities and Shareholders' Equity
Cash	$30,000	Accounts payable	$105,000
Accounts receivable	260,000	Accruals	20,000
Inventory	210,000	Bank loan	150,000
Current assets	500,000	Current liabilities	275,000
Capital assets	550,000	Long-term debt	200,000
		Common stock	175,000
		Retained earnings	400,000
Total assets	$1,050,000	Total liabilities and equity	$1,050,000

a.  Using a percent-of-sales method, determine whether Clyde’s can handle a 30 percent sales increase without using external financing. If so, what is the need?         

    

The firm  (Click to select)  has  needs  $  in  (Click to select)  surplus funds  external funds  .

b. If the average collection period of receivables could be held to 43 days, what would the need be for external financing? All other relationships remain the same.    

          

New funds required

$

Suppose the following results with the increased sales of $600,000. The first $75,000 of any new funds would be short-term debt and then long-term debt.      

      

Income Statement
Cash increases by		$5,000
Average collection period		43	days
Inventory turnover (COGS)		6	X
Capital assets increase by		$125,000
Accounts payable increase	in proportion to sales
Accruals	No change
Long-term debt decreases by		$25,000
Gross profit margin		40	%
Selling, general, and administrative expense increase by		$50,000
Amortization increases by		$12,500
Interest decreases by		$10,000
Tax rate		35	%
Dividends increase to		$120,000

c-1. What new funds would be required? (Enter your answers in thousands, rounded to 2 decimal places.)   

   

New funds required

$

c-2. Prepare the pro forma balance sheet. (Input all answers in thousands. Be sure to list the assets and liabilities in order of their liquidity. Round the final answer to 1 decimal place. )

    

Balance Sheet ($ thousands)
Assets		Liabilities and Equity
(Click to select)  Prepaid expenses  Capital asset  Inventory  Cash  Accounts receivable	$	(Click to select)  Common stock  Accounts receivable  Accounts payable  Retained earnings  Cash  Capital assets	$
(Click to select)  Accounts receivable  Cash  Capital asset  Inventory  Prepaid expenses		(Click to select)  Accruals  Retained earnings  Accounts payable  Common stock  Accounts receivable
(Click to select)  Cash  Prepaid expenses  Accounts receivable  Inventory  Gross plant		(Click to select)  Bank loan  Retained earnings  Accounts payable  Common stock  Accounts receivable
Current assets		Current liabilities
(Click to select)  Cash  Current assets  Inventory  Accounts receivable  Capital assets
		(Click to select)  Long-term debt  Accruals  Accounts payable  Capital assets  Bank loan
		(Click to select)  Common stock  Accruals  Accounts payable  Capital assets  Bank loan
		(Click to select)  Retained earnings  Accruals  Accounts payable  Capital assets  Bank loan
Total assets	$	Total liabilities and shareholders' equity	$

Answer 1

Answer :-

Part A 1.

Earnings after Tax. a. $174000 (235000-61000)

Sales. b. $2000000

Profit Margin (a/b). 8.70%

2. Dividend a. $104000

Earning b. $174000

Payout ratio. (a/b) 60.00% approx

3. Changes in Sales. ($2000000×30%) $600000

Current Assets a. $500000

Current Liabilities b. $275000

Sales. C. $2000000

Change in Sales. d. $600000

Profit on new sale ($2.6M × 8.7%) e $226200

Payout ratio. f. 0.60

a/c×d. 1. $150000

b/C ×d. 2. $82500

e(1-f). 3. $90480

Excess funds available 1-2-3 ($22980)

There is no requirement of new funds

Part B.

Current Average collection period (260000×365)

= 47.45

New accounts Receivable Balance

2600000×47.45/365. = $338000

2600000 sale and ACP 43 Days

2600000×43/365. =$306301

Decrease in fund requirement (338000-306301)

= $31699

New funding (decrease) (31699+22980)

= $54679

Excess fund Available which can be used to pay bank loans or invest in securities/Assets.

Part C:- This Income Statement is prepared after the changes in increase and decrease of every particular.

Income Statement

Sales $2600000

Gross profit @40%. $1040000

Less :- Expenses

Selling and administrative Expenses. $450000

(Increases by 50000)

Amortization (increases by $12500). $67500

Earnings before Interest and taxes. $522500

Interest. $40000

Earnings before tax. $482500

Taxes @35%. $168875

Earnings available to Common

Shareholders $313625

Dividend paid. $120000

Transfer to retained earning. $193625

Balance sheet

Assets	amount	Liabilities &shareholders equity	amount
Cash	$35000	account Payable	$136500
Account Receivable	$306300	Accruals	$20000
Inventory	$260000	Bank loan	$176200
Total Current Assets(cash,Account Receivable,Inventory)	$601300	Total current Liabilities(Accounts Payable, Accruals,Bank loan)	$332700
Capital assets	$675000	long term debt	$175000
		Retained earning	$593600
		Common stock	$175000
Total Assets(601300+675000)	$1276300	Total Liabilities & shareholders equity(332700+175000+175000+593600)	$1276300

Net fund required = ($1276300-$1250100)

=$26200

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