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):

Sales for 2015 were $325 million and net income for the year was $9.75 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.9 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.

If sales are projected to increase by $70 million, or 21.54%, 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

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.
....%

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.

FINANCIAL FORECASTING Sue Wilson, the new financial manager of New World Chemicals (NWC), a

California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast

for 2017. NWC’s 2016 sales were $2 billion, and the marketing department is forecasting a 25% increase for

2017. Wilson thinks the company was operating at full capacity in 2016, but she is not sure. The first step in

her forecast was to assume that key ratios would remain unchanged and that it would be “business as usual”

at NWC. The 2016 financial statements, the 2017 initial forecast, and a ratio analysis for 2016 and the 2017

initial forecast are given in Table IC 16.1.

Assume that you were recently hired as Wilson’s assistant and that your first major task is to help her

develop the formal financial forecast. She asks you to begin by answering the following questions.

a. Assume (1) that NWC was operating at full capacity in 2016 with respect to all assets, (2) that all assets

must grow at the same rate as sales, (3) that accounts payable and accrued liabilities also will grow at

the same rate as sales, and (4) that the 2016 profit margin and dividend payout will be maintained.

Under those conditions, what would the AFN equation predict the company’s financial requirements to

be for the coming year?

b. Consultations with several key managers within NWC, including production, inventory, and receivable

managers, have yielded some very useful information.

1. NWC’s high DSO is largely due to one significant customer who battled through some hardships the

past 2 years but who appears to be financially healthy again and is generating strong cash flow. As a

result, NWC’s accounts receivable manager expects the firm to lower receivables enough for a

calculated DSO of 34 days without adversely affecting sales.

2. NWC was operating slightly below capacity; but its forecasted growth will require a new facility,

which is expected to increase NWC’s net fixed assets to $700 million.

3. Arelatively newinventorymanagement system(installed last year) has taken some time to catch on and

to operate efficiently.NWC’s inventory turnover improved slightly last year, but this yearNWC expects

even more improvement as inventories decrease and inventory turnover is expected to rise to 10 .

Incorporate that information into the 2017 initial forecast results, as these adjustments to the initial forecast

represent the final forecast for 2017. (Hint: Total assets do not change from the initial forecast.)

c. Calculate NWC’s forecasted ratios based on its final forecast and compare them with the company’s

2016 historical ratios, the 2017 initial forecast ratios, and the industry averages. How does NWC

compare with the average firm in its industry, and is the company’s financial position expected to

improve during the coming year? Explain.

income statements and balance sheets follow for Microsoft Corporation. Refer to these financial statements to answer the requirements. (non-operating items are red-marked)

Required:

Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.

Compute net operating assets (NOA) for 2016 and 2015. Assume Equity and other investments are operating assets.

Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $26,720 million in 2014.

Compute return on equity (ROE) for 2016 and 2015. (Stockholders’ equity in 2014 is $89,784 million.)

What is nonoperating return component of ROE for 2016 and 2015?

Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?

Case 1- Determining Lease Capitalization Amounts

Hill Corporation, a diversified manufacturing company, has offices and operating locations in major cities throughout the United States. The corporate headquarters for Hill Corporation is located in Chicago, Illinois, and employees connected with various phases of company operations travel extensively. Corporate management is currently evaluating the feasibility of acquiring a business aircraft that can be used by company executives to expedite business travel to areas not adequately served by commercial airlines. Proposals for either leasing or purchasing a suitable aircraft have been analyzed, and the leasing proposal was considered to be more desirable. The proposed lease agreement involves a fully equipped business jet that has a fair value of $10,000,000. This plane would be leased for a period of 10 years beginning January 1, 2016. The lease agreement is cancelable only upon accidental destruction of the plane. An annual lease payment of $1,417,800is due on January 1 of each year; the first payment is to be made on January 1, 2016. Maintenance operations are scheduled by the lessor, and Hill Corporation will pay for these services as they are performed. Estimated annual maintenance costs are $69,000. The lessor will pay all insurance premiums and local property taxes, which amount to a combined total of $40, 000 annually and are included in the annual lease payment of $1,417,800. Upon expiration of the 10-year lease, Hill Corporation can purchase the CJ4 for $444,400. The estimated useful life of the plane to Hill is 10 years, and its salvage value in the used plane market is estimated to be $750,000.If the purchase option is not exercised, possession of the plane will revert to the lessor, and there is no provision for renewing the lease agreement beyond its termination on December 31, 2023. Hill Corporation can borrow $10,000,000 under a 10-year term loan agreement at an annual interest rate of 12%. The lessor's implicit interest rate is not expressly stated in the lease agreement, but this rate appears to be approximately 8% based on 10 annual net rental payments and the initial fair value of $10,000,000 for the plane. On January 1, 2016, the present value of all net rental payments and the purchase option of $444,440 is $8,888,900 using the 12% interest rate. The present value of all net rental payments and the $44,440 purchase option on January 1, 2016, is $10,222,260 using the 8% interest rate implicit in the lease agreement. The controller of Hill Corporation has established that this lease agreement is a capital lease as defined in GAAP. Hill has not early adopted ASU 2016-02.

Required:

What is the appropriate amount that Hill Corporation should recognize for the leased aircraft on its balance sheet after the lease is signed?

Assume instead that the annual lease payment is $1,417,800, that the appropriate capitalized amount for the leased aircraft is $10,000,000 on January 1, 2016, the interest rate is 9% and that the lease term is 10 years. How will the lease be reported on Hill’s December 31, 2016, balance sheet and related income statement? (Ignore any income tax implications.)

inocera Inc. is a designer, manufacturer, and distributor of low-cost, high-quality stainless steel kitchen knives. A new kitchen knife series called the Kitchen Ninja was released for production in early 2016. In January, the company spent $600,000 to develop a late-night advertising infomercial for the new product. During 2016, the company spent $1,402,000 promoting the product through these infomercials, and $819,000 in legal costs. The knives were ready for manufacture on January 1, 2016. Ginocera uses a job order cost system to accumulate costs associated with the kitchen knife. The unit direct materials cost for the knife is: Hardened steel blanks (used for knife shaft and blade) $3.85 Wood (for handle) 1.40 Packaging 0.40 The production process is straightforward. First, the hardened steel blanks, which are purchased directly from a raw material supplier, are stamped into a single piece of metal that includes both the blade and the shaft. The stamping machine requires one hour per 250 knives. After the knife shafts are stamped, they are brought to an assembly area where an employee attaches the handle to the shaft and packs the knife into a decorative box. The direct labor cost is $0.45 per unit. The knives are sold to stores. Each store is given promotional materials, such as posters and aisle displays. Promotional materials cost $60 per store. In addition, shipping costs average $0.15 per knife. Total completed production was 1,200,000 units during the year. Other information is as follows: Number of customers (stores) 58,500 Number of knives sold 1,128,000 Wholesale price (to store) per knife $17 Factory overhead cost is applied to jobs at the rate of $650 per stamping machine hour after the knife blanks are stamped. There were an additional 28,000 stamped knives, handles, and cases waiting to be assembled on December 31, 2016. Required: A. Prepare an annual income statement for the Kitchen Ninja knife series, including supporting calculations, from the information provided. Refer to the list of Amount Descriptions for exact wording of the answer choices for text entries.* B. Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 2016.* * In your computations, if required, round interim per-unit costs to two decimal places.

A. Prepare an annual income statement for the Kitchen Ninja knife series, including supporting calculations, from the information provided. Refer to the list of Amount Descriptions for exact wording of the answer choices for text entries. In your computations, if required, round interim per-unit costs to two decimal places.

B. Determine the balances in the work in process and finished goods inventories for the Kitchen Ninja knife series on December 31, 2016. In your computations, if required, round interim per-unit costs to two decimal places.

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? 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 one decimal place.
   $ ________________million
   
2. What are the amounts of net operating working capital for both years? 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 answers to one decimal place.
   2016 $ ____________million
   2015 $ ____________-million
   
3. What are the amounts of total net operating capital for both years? 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 answers to one decimal place.
   2016 $ _____________million
   2015 $ ____________-million
   
4. What is the free cash flow for 2016? 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 one decimal place.
   $ ___________million
   
5. What is the ROIC for 2016? Round your answer to two decimal places.
   %____________
   
6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) 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 answers to one decimal place.

   After-tax interest payment	$   million
   Reduction (increase) in debt	$   million
   Payment of dividends	$   million
   Repurchase (Issue) stock	$   million
   Purchase (Sale) of short-term investments	$   million

During 2016, Flounder Corporation spent $151,200 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2016, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $19,200 related to the patent were incurred as of October 1, 2016.

Prepare all journal entries required in 2016 and 2017 as a result of the transactions above. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

eTextbook and Media

Solution

List of Accounts

Attempts: unlimited

(b)

On June 1, 2018, Flounder spent $9,920 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2018. Prepare all journal entries required in 2018 and 2019. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

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):

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

Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

What is the net operating profit after taxes (NOPAT) for 2016? 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 one decimal place.
$ ____ million

What are the amounts of net operating working capital for both years? 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 answers to one decimal place.
2016 $ ____ million
2015 $ ____ million

What are the amounts of total net operating capital for both years? 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 answers to one decimal place.
2016 $ __ million
2015 $ __ million

What is the free cash flow for 2016? 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 one decimal place.
$ ___ million

What is the ROIC for 2016? Round your answer to two decimal places.
____%

How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint:Remember that a net use can be negative.) 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 answers to one decimal place.

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? 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 one decimal place.
   $   million
   
2. What are the amounts of net operating working capital for both years? 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 answers to one decimal place.
   2016 $   million
   2015 $   million
   
3. What are the amounts of total net operating capital for both years? 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 answers to one decimal place.
   2016 $   million
   2015 $   million
   
4. What is the free cash flow for 2016? 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 one decimal place.
   $   million
   
5. What is the ROIC for 2016? Round your answer to two decimal places.
   %
   
6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) 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 answers to one decimal place.

   After-tax interest payment	$   million
   Reduction (increase) in debt	$   million
   Payment of dividends	$   million
   Repurchase (Issue) stock	$   million
   Purchase (Sale) of short-term investments	$   million