A. Symbolic Logic Corporation is a technological leader in the application of surface mount technology in the manufacture of printed circuit boards used in the personal computer industry. The firm recently patented an advanced version of its path-breaking technology and expects sales to grow from its present level of P5 million to P8 million by the end of the coming year. Since the firm is at present operating at full capacity, it expects to have to increase its investment in both current and fixed assets in proportion to the predicted increase in sales. The firm’s net profits were 7 percent of current year’s sales but are expected to rise to 8 percent of next year’s sales. To help support its anticipated growth in asset need next year, the firm has suspended plans to pay cash dividends to its stockholders. In years past a P1.25 per share dividend has been paid annually. Symbolic Logic Corp. Balance Sheet December 31, 2009 (in millions) Current Assets Net Fixed Assets Total
P2.5 3.0 P5.5 === Accounts Payable P1.0 Accrued Expenses 0.5 Long-term debt 2.0 Ordinary shares 0.5 Retained earnings 1.5 Total P5.5 === SLC’s payables and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds needed to finance next year’s operations and that are not forthcoming from other sources. a. Fill in the table and project the firm’s needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing need. b. Compare SLC’s current ratio and debt ratio before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of SLC’s financial condition? B. Ferrari Company has the following statements which are representative of the company’s historical average: Income Statement Sales Cost of sales Gross Profit Operating Expenses Operating Income Interest Expense Earnings before tax Income tax (35%) Net income
P8,000,000 4,800,000 P3,200,000 1,520,000 1,680,000 280,000 1,400,000 490,000 P 910,000 =======
Balance Sheet Cash Accounts receivable Inventory Property and Equipment Total Assets
P 200,000 1,600,000 3,000,000 3,200,000 P8,000,000 =======
Accounts Payable P1,000,000 Accrued liabilities 120,000 Bonds Payable 600,000 Preference shares 280,000 Ordinary shares 4,800,000 Retained earnings 1,200,000 Total liabilities and equity P8,000,000 ======= The firm is expecting a 20 percent increase in sales next year. Only the current assets are expected to vary with sales with fixed asset to remain at the same level. Only the current
liabilities will increase with sales. The long term liabilities are expected to be at the same level. The company pays dividends to its preference shares at 10%. Dividend pay out ratio for the ordinary shares is 60%. Any additional financing requirement will be financed with following mix, 10% bonds, 5% preference and 85% ordinary shares. Required: 1. Determine the discretionary financing requirement (or surplus) 2. Prepare the forecasted financial statement (first pass – plotting the financial feedback) C. Wimbledon, Inc. estimates that it invests 40 cents in assets for each dollar of new sales. However, 5 cents in profits are produced by each dollar of additional sales, of which 1 cent can be reinvested in the firm. If sales rise from their present level of $5 million by $0.5 million next year, and the ratio of spontaneous liabilities to sales is 0.15, what will the firm’s need for discretionary financing? D. The financial statements of the Boogie World, Inc. for the current year are as follows:
Additional information: 1. For next year (2010), the company expects sales to increase by 15%. Only current assets and current liabilities will continue to vary with sales. 2. Depreciation expense is equal to the cost of replacing worn-out assets. 3. The corporation wants to maintain its dividend pay-out ratio of 70%. 4. The market prices for the bonds, preference shares, and ordinary shares will approximate their face value and par values. Requirements: 1. How much is the total assets of the firm and determine the discretionary financing requirement if all the projections hold true. 2. Prepare the forecasted financial statements if the company is planning to source the discretionary financing requirement from issuing bonds, preference or ordinary shares. Decide the most appropriate financing source if the company is to maximize its earnings per share. 3. Determine the amount of increase in sales that will not require additional financing requirement for the company. E. The Millennium Company has the following statements which are representative of the company’s historical average.
Income Statement Sales Cost of Sales
P2,000,000 1,200,000 Gross profit 800,000 Operating expenses
380,000 Earnings before interest and taxes Interest expense Earnings before taxes Taxes (35%) Earnings after taxes
420,000 70,000 350,000 122,000 P 227,500
Dividends
P 136,000 Balance Sheet Assets
Cash Accounts receivable Inventory Current assets Fixed assets (net)
P 50,000 400,000 750,000 P1, 200,000 800,000 Total assets P2, 000,000 Liabilities and Equity
Accounts payable Accrued wages Accrued taxes Current liabilities Notes payable – bank Long-term debt Ordinary shares 200,000 300,000 P 2,000,000
P 250,000
10,000
20,000 P 280,000 70,000 150,000
1,
Retained earnings Total liabilities and equity
The firm is expecting a 25% percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales. Dividend pay-out ratio will be the same. Required: Using the percent-of-sales method, determine whether the company has external financing needs or a surplus of funds.
F. (Financial Forecasting) Sambonoza Enterprises projects its sales next year to be $4million and expects to earn 5 percent of that amount after taxes. The firm is currently in the process of projecting its financing needs and has made the following assumptions (projections): 1. Current assets will equal 20 percent of sales, while fixed assets will remain at their current level of $1 million. 2. Common equity is currently $0.8 million, and the firm pays out half its after-tax earnings in dividends. 3. The firm has short-term payables and trade credit that normally equal 10 percent of sales, and has no long-term dept outstanding. Required: What are Sambonoza’s financing needs for the coming year? G. (Financing Forecasting-Percent of Sales) Tulley Appliances, Inc., projects next year’s sales to be $20 million. Current sales are at $15 million based on current assets of $5
million and fixed assets of $5 million. The firm’s net profit margin is 5 percent after taxes. Tulley forecasting casts that current assets will raise in direct proportion to the increase in sales, but fixed assets will increase by only $100,000. Currently, Tulley has $1.5 million in accounts payable (which vary directly with sales), $2 million in long-term debt (due in ten years) and common equity (including $4 million in retained earnings) totaling $6.5 million. Tulley plans to pay $500,000 in common stock dividends next year. a.
What are Tulley’s total financing needs (that is, total assets) for the coming year?
b. Given the firm’s projections and dividend payment plans, what are its discretionary financing needs? Based on your projections, and assuming that the $100,000 expansion in fixed assets will occur, what is the largest increase in sales the firm can support without having to resort to the use of discretionary sources of financing?
