In: Accounting
Morrissey Technologies Inc.'s 2019 financial statements are shown here.
Morrissey Technologies Inc.: Balance Sheet as of December 31, 2019 | ||||
Cash | $180,000 | Accounts payable | $360,000 | |
Receivables | 360,000 | Notes payable | 56,000 | |
Inventories | 720,000 | Accrued liabilities | 180,000 | |
Total current assets | $1,260,000 | Total current liabilities | $596,000 | |
Long-term debt | 100,000 | |||
Fixed assets | 1,440,000 | Common stock | 1,800,000 | |
Retained earnings | 204,000 | |||
Total assets | $2,700,000 | Total liabilities and equity | $2,700,000 |
Morrissey Technologies Inc.: Income Statement for December 31, 2019 | |||
Sales | $3,600,000 | ||
Operating costs including depreciation | 3,279,720 | ||
EBIT | $320,280 | ||
Interest | 20,280 | ||
EBT | $300,000 | ||
Taxes (25%) | 75,000 | ||
Net Income | $225,000 | ||
Per Share Data: | |||
Common stock price | $45.00 | ||
Earnings per share (EPS) | $2.25 | ||
Dividends per share (DPS) | $1.35 |
Suppose that in 2020, sales increase by 15% over 2019 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2019 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 89.5% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2020 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.
Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2020 | |||
2019 | 2020 | ||
Sales | $3,600,000 | $ | |
Operating costs (includes depreciation) | 3,279,720 | ||
EBIT | $320,280 | $ | |
Interest expense | 20,280 | ||
EBT | $300,000 | $ | |
Taxes (25%) | 75,000 | ||
Net Income | $225,000 | $ | |
Dividends (60%) | $ | $ | |
Addition to retained earnings | $ | $ |
Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2020 | |||
2019 | 2020 | ||
Assets | |||
Cash | $180,000 | $ | |
Accounts receivable | 360,000 | ||
Inventories | 720,000 | ||
Fixed assets | 1,440,000 | ||
Total assets | $2,700,000 | $ | |
Liabilities and Equity | |||
Payables + accruals | $540,000 | $ | |
Short-term bank loans | 56,000 | ||
Total current liabilities | $596,000 | $ | |
Long-term bonds | 100,000 | ||
Total liabilities | $696,000 | $ | |
Common stock | 1,800,000 | ||
Retained earnings | 204,000 | ||
Total common equity | $2,004,000 | $ | |
Total liabilities and equity | $2,700,000 | $ |