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, 2015, 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 2015 were $400 million and net income for the year was $12 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.8 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, 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 2016. Do not round intermediate calculations.

1. If sales are projected to increase by $60 million, or 15%, during 2016, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $    million
   
2. 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.
     %
   
3. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2016. 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 2016 as they were in 2015. What is the amount of the line of credit reported on the 2016 forecasted balance sheets? (Hint: You don't need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2016 addition to retained earnings for the balance sheet.) Round your answers to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.

   Upton Computers Pro Forma Balance Sheet December 31, 2016 (Millions of Dollars)
   Cash	$
   Receivables	$
   Inventories	$
   Total current assets	$
   Net fixed assets	$
   Total assets	$
   Accounts payable	$
   Notes payable	$
   Accruals	$
   Total current liabilities	$
   Mortgage loan	$
   Common stock	$
   Retained earnings	$
   Total liabilities and equity

Answer 1

a)

Sales = $400 million

Dividend payout = 40%

Profit margin = 3%

Sales growth = 15%

1) Increase in assets necessary to support increase in sales = Increase in sales×Total assets =$122.5×15% =$18.375

2) Increase in liabilities necessary to support increase in sales = Increase in sales×Total assets

=(Accounts payable+Accrued liabilities) ×Total sales

=($9+$8.5) ×15% =$2.625

3) company will maintain profit margin & dividend payout

Income that will be added to retained earnings

Net sales($400+60) =$400

Profit (460×3%) =13.8

Less:dividend payoutpayout(13.8×40%) =$5.52

So addition to retained earning=(13.8-5.52) =$8.28

Therefore, AFN(1-2-3) =$18.375-2.625-5.52

=$10.23

b)

AFN = Increase in assets - Increase in liabilities -Addition to retained earnings

0 = 122.5(X)-17.5(X)-[400×(1+X)(3%)(1-40%)]

0 =$105(X) -$7.2(1+x)

$105(X) = $7.2(1+X)

$105(X) = $7.2+$7.2(X)

$105(X) -$7.2(X) = $7.2

$ 97.8(X) = $7.2

X =$7.2/97.8 =0.0736196319

X =7.36% self supporting growth rate

C)

Balance sheet

		15% increase			15% increase
	2015 (1)	2016 (1+15%)		2015 (2)	2016 (2+15%)
Cash	$3.5	$4.025	Accounts payable	$9	$10.35
Receivables	$26	$29.9	Notes payable	$18	$20.7
Inventory	$58	$66.7	Line of credit	$0	$10.23
			Accruals	$8.5	$9.775
Total current assets	$87.5	$100.625	Total current liabilities	$35.5	$51.055
			Mortgage bonds	$6	$6
Net fixed assets	$35	$40.25	Common stock	$15	$15
Deficit		$2.7(143.575-140.875)	Retained earnings	$66	$74.28 (66+8.28)
Total assets	$122.5	$143.575	Total liability and equity	$122.5	$143.575