Question

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 20% 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 90% 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. Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Do not round intermediate calculations. Round your answers to the nearest cent. Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2020 2019 2020 Sales $3,600,000 $ 4320000 Operating costs (includes depreciation) 3,279,720 3888000 EBIT $320,280 $ 432000 Interest expense 20,280 61920 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 $ If the profit margin remains at 6.25% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero? In other words, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

a)
Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2017
	2016	Forecast Basis	2017 Pro Forma
Sales	3600000	1.2	4320000
Operating costs (includes depreciation)	3279720	0.90	3888000
EBIT	320280		432000
Interest expense	20280		20280
EBT	300000		411720
Taxes (25%)	75000		102930
Net Income	225000		308790
Dividends =(1.08 x 100000) ; 60% of NI	108000		185274
Addition to RE	117000		123516
Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2017
	2016	Forecast Basis	2017 Pro Forma
Cash	180000	0.050	216000
Accounts receivable	360000	0.100	432000
Inventories	720000	0.200	864000
Fixed assets	1440000	0.400	1728000
Total assets	2700000		3240000
Liabilities and Equity
Payables + accruals	540000	0.15	648000
Short-term bank loans	56000	1.3	72800
Total current liabilities	596000	$	720800
Long-term bonds	100000	$	391684
Total debt	696000	$	$
Common stock	1800000	$	1800000
Retained earnings	204000	123516	327516
Total common equity	2004000	$	2127516
Total liab. and equity	2700000	$	3240000
b)
AFN = $2,700,000/$3,600,000 x ( △Sales) - ($360,000 + $180,000) /$3,600,000 x ( △Sales) - (0.05) x ($3,600,000 + △ Sales) x .25
$0 = 0.75(△Sales) - 0.15(△Sales) - 0.0125(△Sales) - $45,000
$0 = 0.5875(△Sales) - $45,000
△ Sales =	$                                76,595.74
Growth rate in sales =  76,595.74/3600000	2.13%