In: Accounting
c. Perform a scenario analysis on this projection. How does R&E’s projected external financing require change if a severe recession occurs in 2016? Assume net sales decline 5 percent, cost of goods sold rises to 88 percent of net sales due to price cutting, and current assets increase to 35 percent of net sales as management fails to cut purchases promptly in response to declining sales.
Year | 2014 | 2015 | 2016 |
Net sales | $ 20,613 | $ 25,766 | $ 30,920 |
Growth rate in sales | 25% | 20% | |
Cost of goods sold/net sales | 86% | 88% | |
Gen., sell,, and admin. expenses/net sales | 12% | 11% | |
Long-term debt | $ 760 | $ 660 | $ 560 |
Current portion long-term debt | $ 100 | $ 100 | $ 100 |
Interest rate | 10% | 10% | |
Tax rate | 45% | 45% | |
Dividend/earnings after tax | 50% | 50% | |
Current assets/net sales | 29% | 35% | |
Net fixed assets | $ 280 | $ 270 | |
Current liabilities/net sales | 14.5% | 14.4% | |
Owners' equity | $ 1,730 | ||
INCOME STATEMENT | |||
Year | 2014 | Forecast 2015 | 2016 |
Net sales | $ 25,766 | $ 30,920 | |
Cost of good sold | 22,159 | 27,209 | |
Gross profit | 3,607 | 3,710 | |
Gen., sell,, and admin. exp. | 3,092 | 3,401 | |
Interest expense | 231 | 498 | |
Earnings before tax | 284 | (189) | |
Tax | 128 | (85) | |
Earnings after tax | 156 | (104) | |
Dividends paid | 78 | (52) | |
Additions to retained earnings | 78 | (52) | |
BALANCE SHEET | |||
Current assets | $ 7,472 | $ 10,822 | |
Net fixed assets | 280 | 270 | |
Total assets | 7,752 | 11,092 | |
Current liabilities | 3,736 | 4,452 | |
Long-term debt | 660 | 560 | |
Equity | 1,808 | 1,756 | |
Total liabilities and shareholders' equity | 6,204 | 6,769 | |
EXTERNAL FUNDING REQUIRED | $ 1,548 |
$ 4,323 |
Formulsa for 2016
=C5*(1+D6) |
=D20*D7 |
=D20-D21 |
=D8*D20 |
498 |
=D22-D23-D24 |
=D12*D25 |
=D25-D26 |
=D13*D27 |
=D27-D28 |
=D14*D20 |
=D15 |
=D31+D32 |
=D16*D20 |
=D9 |
=C36+D29 |
=D34+D35+D36 |
=D33-D37 |
Something is wrong I dont know were the issues is.
I believe the issue might be with regards to circular references in excel. Since the interest has to be calculated on the external funding but the external funding is calculated only after determining additions to retained earnings, the calculations sort of are interdependent, thus causing a circular reference. Simple fix would be to go to Excel and File-Options-Formulas-Enable iterative calculation.
Based on the assumptions given, data for 2016 would look like this:
Note: Dividends will not be paid as earnings after tax is negative. The Interest amount of 367 is derived as : (660+1548+External funding for 2016)*10%
Balance Sheet for 2016
The External Funding formula would be : Total Assets - Total(Liabilities and Equity) and Interest calculation in income statement would be (660 +1548 +External funding for the 2016)*10%. Since the two are dependent on each other, a circular reference gets formed. As mentioned at the beginning, the iteration facility in excel needs to be enabled in order to calculate the two.
Note: 1548 is nothing but the external funding in 2015.