Several Finance Formulas - Long Term Financial Planning

Long Term Financial Planning: 1. The following is the financial statement of Executive Fruit Company for the year ended December 2014. INCOME STATEMENT, 2014 (Figures in $ Thousands) Revenue $ 11,000 Cost of goods sold 9,900 EBIT $ 1,100 Interest 220 Earnings before taxes $ 880 State and federal tax 352 Net income $ 528 Dividends 352 Additions to retained earnings $ 176 BALANCE SHEET (Year-End, 2014) (Figures in $ Thousands) Assets Net working capital $ 1,100 Fixed assets 4,400 Total assets $ 5,500 Liabilities and shareholders' equity Long-term debt $ 2,200 Shareholders' equity 3,300 Total liabilities and shareholders' equity $ 5,500 The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. First stage pro forma statements: PRO FORMA INCOME STATEMENT, 2015 (Figures in $ Thousands) Revenue $ 12,100 Cost of goods sold 10,890 EBIT $ 1,210 Interest 220 Earnings before taxes $ 990 State and federal tax 396 Net income $ 594 Dividends 396 Additions to retained earnings $ 198 PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands) Assets Net working capital $ 1,210 Fixed assets 4,840 Total assets $ 6,050 Liabilities and shareholders' equity Long-term debt $ 2,200 Shareholders' equity 3,498 Total liabilities and shareholders' equity $ 5,698 Required external financing $ 352 Second stage pro forma balance sheet: PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands) Assets Net working capital $ 1,210 Fixed assets 4,840 Total assets $ 6,050 Liabilities and shareholders' equity Long-term debt $ 2,552 Shareholders' equity 3,498 Total liabilities and shareholders' equity $ 6,050 How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.) Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ . The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.): Long-term debt $ Shareholders' equity Total $ 2. Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 2.20; profit margin = 6%; payout ratio = 30%; equity/assets = .50. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Sustainable growth rate % Internal growth rate % 3. Executive Fruit’s financial manager believes that sales in 2015 could rise by as much as 20% or by as little as 5%. Assets and costs change in proportion to sales, debt remains constant, and no new equity financing occurs. a. Recalculate the first-stage pro forma financial statements under these two growth assumptions and calculate the required external financing (All figures are in thousands). (Enter your answers in thousands.) Base Case 20% Growth 5% Growth INCOME STATEMENT Revenue $ 3,000 $ $ Cost of goods sold 2,700 EBIT $ 300 $ $ Interest 60 Earnings before taxes $ 240 $ $ State and federal tax 96 Net income $ 144 $ $ Dividends 96 Retained earnings $ 48 $ $ BALANCE SHEET Assets Net working capital $ 300 $ $ Fixed assets 1,200 Total assets $ 1,500 $ $ Liabilities and shareholders' equity Long-term debt $ 600 $ $ Shareholders' equity 900 Total liabilities and shareholders' equity $ 1,500 $ $ Required external financing $ $ b. Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet. (Enter your answers in thousands.) BALANCE SHEET Base Case 20% Growth 5% Growth Assets Net working capital $ 300 $ $ Fixed assets 1,200 Total assets $ 1,500 $ $ Liabilities and shareholders' equity Long-term debt $ 600 $ $ Shareholders' equity 900 Total liabilities and shareholders' equity $ 1,500 $ $ 4. Plank’s Plants had net income of $16,000 on sales of $60,000 last year. The firm paid a dividend of $1,600. Total assets were $900,000, of which $450,000 was financed by debt. a. What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Sustainable growth rate % b. If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.) New debt $ c. What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Maximum growth rate % 5. An all-equity-financed firm plans to grow at an annual rate of at least 22%. Its return on equity is 34%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Maximum dividend payout ratio % 6. The 2015 financial statements for Growth Industries are presented below: INCOME STATEMENT, 2015 Sales $ 400,000 Costs 250,000 EBIT $ 150,000 Interest expense 30,000 Taxable income $ 120,000 Taxes (at 35%) 42,000 Net income $ 78,000 Dividends $ 39,000 Addition to retained earnings 39,000 BALANCE SHEET, YEAR-END, 2015 Assets Liabilities Current assets Current liabilities Cash $ 9,000 Accounts payable $ 16,000 Accounts receivable 14,000 Total current liabilities $ 16,000 Inventories 27,000 Long-term debt 300,000 Total current assets $ 50,000 Stockholders’ equity Net plant and equipment 340,000 Common stock plus additional paid-in capital 15,000 Retained earnings 59,000 Total assets $ 390,000 Total liabilities and stockholders’ equity $ 390,000 Sales and costs in 2016 are projected to be 30% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .50. What is the required external financing over the next year? Even if sales increase by 30%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity.