Question

HBM, Inc. had sales of $9 million and a net profit margin of 10 percent in 20X0. Management expects sales to grow to $10.8 million and $12.6 million in 20X1 and 20X2, respectively. Management wants to know if additional funds will be necessary to finance this anticipated growth. Currently, the firm is not operating at full capacity and should be able to sustain a 25 percent increase in sales. However, further increases in sales will require $3 million in plant and equipment for every $5 million increase in sales. (Note that even if sales increase by less than $5 million, the total amount of $3 million investment in plant and equipment is still required.) The firm's balance sheet is as follows:

HBM, Incorporated Balance Sheet as of 12/31/X0
Assets				Liabilities and Equity
Cash	$	1,170,000		Accruals	$	1,800,000
Accounts receivable		2,520,000		Accounts payable		450,000
Inventory		900,000		Notes payable		340,000
Plant and equipment		1,500,000		Long-term debt		1,500,000
				Equity		2,000,000
	$	6,090,000			$	6,090,000

Management has followed a policy of distributing at least 70 percent of earnings as dividends. Management believes that the percent of sales method of forecasting is sufficient to answer the question, "Will outside funding be necessary?" To use this technique, management has assumed that accounts receivable, inventory, accruals, and accounts payable will vary with the level of sales. Cash will not change.

1. Prepare projected balance sheets for 20X1 and 20X2 that incorporate any necessary outside financing. Any short-term funds that are required should be obtained through a loan from the bank, and any excess short-term funds should be appropriately invested. Any long-term financing that is needed should be obtained through long-term debt. Round your answers to the nearest dollar.

   HBM, Incorporated Balance Sheet as of 12/31/X1
   Assets				Liabilities and Equity
   Cash	$			Accruals	$
   Marketable securities				Accounts payable
   Accounts receivable				Notes payable
   Inventory				Long-term debt
   Plant and equipment				Equity
   	$				$

   HBM, Incorporated Balance Sheet as of 12/31/X2
   Assets				Liabilities and Equity
   Cash	$			Accruals	$
   Marketable securities				Accounts payable
   Accounts receivable				Notes payable
   Inventory				Long-term debt
   Plant and equipment				Equity
   	$				$

2. If the firm did not distribute 70 percent of its earnings, could it sustain the expansion without issuing additional long-term debt? Round your answer to the nearest dollar.

   If the firm did not distribute 70 percent of its earnings, the maximum possible retained earnings would be $_____. A change in the dividend policy -Select- would or would not cover the expansion in plant and equipment.

3. If the firm's creditors in part a require a current ratio of 3:1, would that affect the firm's financing in 20X1 and 20X2? If so, what additional actions could the firm take? Round your answers to two decimal places.

   According to the forecast in part a, the current ratios in 20X1 and 20X2 are ___ :1 and ____ :1, respectively. If the firm's creditors require a current ratio of 3:1, the firm -Select- will or will not meet the current ratio requirement and -Select- should or should not take additional actions to low current ratio.

4. If the percent of sales forecasts are replaced with the following regression equations:

   Accounts receivable	=	$100,000 + 0.12 Sales,
   Inventory	=	$250,000 + 0.20 Sales,
   Accruals	=	$150,000 + 0.07 Sales,
   Accounts payable	=	$250,000 + 0.11 Sales,

   what is the firm's need for outside funding (if any) in 20X1 and 20X2? Round your answers to the nearest dollar. Enter your answers as positive values.

   In 20X1 the firm -Select- will need external or will have excess funds of $____ .
   In 20X2 the firm -Select- will need external or will have excess funds of $ ____

5. If the firm's creditors in part d required a current ratio of 3:1, would that affect the firm's financing in 20X1 and 20X2? If so, what additional actions could the firm take? Round your answers to the nearest dollar.

   If the firm's creditors in part d required a current ratio of 3:1, the maximum amount of current liabilities in 20X1 is $ ____ . The forecast indicates that the firm -Select-would or would not meet the current ratio requirement.

   If the firm's creditors in part d required a current ratio of 3:1, the maximum amount of current liabilities in 20X2 is $ ____ . The forecast indicates that the firm -Select-would or would not meet the current ratio requirement.

Answer 1