Question

Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000.

Financial Statements and Forecasting

1. (15) You have the following information for Houdini Homes for Year 0:

Houdini Homes: Income Statement (M$)	Y0	Y1
Sales	1400
Cost of Goods Sold	700
SG&A (Selling, General and Admin) Expenses	200
Depreciation Expense	86
Earnings Before Interest & Tax (EBIT)	414
Interest Expense	34
Earnings Before Tax	380
Taxes (25%)	95
Net Income	285
Dividends	100

Houdini Homes: Balance Sheet (M$)	Y0	Y1
Cash	100
Accounts Receivable	300
Inventories	500
Current Assets	900
Gross Property, Plant & Equipment (PPE)	400
Accumulated Depn.	300
Net Property, Plant & Equipment	100
TOTAL ASSETS	1,000
Accruals	25
Accounts Payable	150
Current Liabilities	175
Long Term Debt	425
Common Stock	100
Retained Earnings	300
Total Liability & Equity	1,000

1. Forecast the income statement and balance sheet for Y1. The following growth rates are relative to the prior year. Sales grow by 20% over the prior year. Cost of goods sold grows by 30%. Selling, General and Administration (SG&A) expenses grow by 10%. Depreciation expense rises to 96M in Y1. Interest expense remains 34M. The tax rate is 25%. ­Accounts receivable grows by 25% over prior year. Inventory grows by 30%; and accounts payable grows 20%. The firm will need 150M more in gross property, plant and equipment (PPE). The following accounts will not change (same dollar amount): dividends, cash, accruals, long-term debt and common stock. Do NOT balance the balance sheet.
2. Calculate the external (additional) funds needed. The external funds needed = total assets – (total liabilities and equity) before balancing the balance sheet.
3. What are two alternatives for balancing the balance sheet?     

Answer 1

	Houdini Homes: Income Statement (M$)	Y0	Y1
	Sales	1400	1680	(1400*1.2)
	Cost of Goods Sold	700	910	(700*1.3
	SG&A (Selling, General and Admin) Expenses	200	220	(200*1.1)
	Depreciation Expense	86	96
	Earnings Before Interest & Tax (EBIT)	414	454
	Interest Expense	34	34
	Earnings Before Tax	380	420
	Taxes (25%)	95	105
	Net Income	285	315
	Dividends	100	100
	Houdini Homes: Balance Sheet (M$)	Y0	Y1
	Cash	100	100
	Accounts Receivable	300	375	(300*1.25)
	Inventories	500	650	(500*1.3)
	Current Assets	900	1125
	Gross Property, Plant & Equipment (PPE)	400	550	(400+150)
	Accumulated Depn.	300	396	(300+96)
	Net Property, Plant & Equipment	100	154
	TOTAL ASSETS	1,000	1279
	Accruals	25	25
	Accounts Payable	150	180	(150*1.2)
	Current Liabilities	175	205
	Long Term Debt	425	425
	Common Stock	100	100
	Retained Earnings	300	515	(300+315-100)
	Total Liability & Equity	1,000	1245
	External Finance Needed		34	(1279-205-425-100-515)
			1279
	Retained earning Y0	300
	Dividend in Y1	-100
	Net Income in Y1	315
	Retained earning Y1	515
	ExternalFinance Needed	34	(1279-1245)
c	Alternatives for balancing the balance Sheet
1	Increase Long term debt
2	Issue common stock