LG4 15-1 Suppose that Wall-E Corp. currently has the following balance sheet, and that sales for
the year just ended were $7 million. The firm also has a profit margin of 27 percent, a
retention ratio of 20 percent, and expects sales of $9 million next year. Fixed assets are
currently fully utilized, and the nature of Wall-E’s fixed assets is such that they must be
added in $1 million increments. If current assets and current liabilities are expected to
grow with sales, what amount of additional funds will Wall-E need from external sources
to fund the expected growth?
Assets Liabilities and Equity
Current
assets $2,000,000 Current
liabilities $2,500,000
Fixed
assets 5,000,000 Long-term
debt 1,500,000
Equity 3,000,000
Total
assets $7,000,000
Total
liabilities
and equity
$7,000,000
In this case, the necessary increase in assets will be:
( )
*
0
Necessary increase in current assets
$2,000,000 $9,000,000 $7, 000,000
$7,000,000
$571, 429
AS
S
= ´ D
= ´ –
=
0
*
Necessary increase in fixed assets
$5,000,000 ($9,000,000 $7,000,000)
$7,000,000
$1, 428,571
AS
S
= ´ D
= ´ –
=
The necessary increase in fixed assets is $1,428,571. However, fixed assets must be
added in $1 million increments. Thus, the asset need for fixed assets must be increased to
$2 million.
The spontaneous increase in liabilities will be:
( )
*
0
Spontaneous increase in liabilities
$2,500,000 $9,000,000 $7, 000,000
$7,000,000
$714, 286
LS
S
= ´ D
= ´ –
=
The projected increase in retained earnings will be:
1
Projected increase in retained earnings
0.27 $9,000,000 0.20
$486,000
M S RR= ´ ´
= ´ ´
=
So AFN will be = $571,429 + $2,000,000 – $714,286 – $486,000 = $1,371,143
advanced
problems
LG3 15-2John’s Bait and Fish shop has had the monthly sales amounts listed as follows for the last
four years. Assuming that there is both seasonality and a trend, estimate monthly sales
for each month of the coming year.
Year: 2010 2011 2012 2013
January $417,812 $585,558 $334,336 $587,080
February 113,240 138,414 165,492 113,788
March 139,815 177,676 86,015 137,015
April 428,157 392,734 512,061 457,425
May 436,880 926,046 534,007 851,622
June 743,947 1,084,321 597,606 741,444
July 1,449,280 1,249,470 1,564,939 1,579,376
August 1,428,123 1,794,586 1,849,585 1,590,067
September 1,178,795 1,022,538 683,038 724,279
October 368,475 465,971 483,142 651,824
November 257,638 389,276 261,309 309,872
December 321,208 386,377 234,736 371,721
LG3 15-3 Sara’s Ice Cream Shop is closed for six months out of the year, but has had the monthly
sales amounts listed as follows for the last four years. Assuming that there is both
seasonality and a trend, estimate monthly sales for each month of the coming year.
Year: 2010 2011 2012 2013
May $436,880 $926,046 $534,007 $851,622
June 743,947 1,084,321 597,606 741,444
July 1,449,280 1,249,470 1,564,939 1,579,376
August 1,428,123 1,794,586 1,849,585 1,590,067
September 1,178,795 1,022,538 683,038 724,279
October 368,475 465,971 483,142 651,824
LG3 15-4 Suppose that the 2013 actual and 2014 projected financial statements for Comfy Corners
Catbeds are initially shown as follows. In these tables, sales are projected to rise by 22
percent in the coming year, and the components of the income statement and balance
sheet that are expected to increase at the same 22 percent rate as sales are indicated by
green type. Assuming that Comfy Corners Catbeds wants to cover the AFN with half
equity, 25 percent long-term debt, and the remainder from notes payable, what amount of
additional funds will be needed if debt carries a 10 percent interest rate?
$4,880,00
Costs $2,600,000
0 A/R $137,000 $167,140
Depreciati
on $1,000,000
$1,220,00
0 Inv $1,013,000
$1,235,86
0
EBIT $400,000 $488,000
Current
Assets $1,750,000
$2,135,00
0
$6,100,00
(40%) $80,800 $101,021
Net
Income $121,200 $151,531 A/P $179,000 $218,380
N/P $980,000
$1,298,04
7
Dividends $60,600 $60,600 Accruals $375,000 $457,500
Current
$1,973,92
Debt $2,534,000
5
Inc in Liab
$121,880.0
0
RE change $90,930.89
AFN
$1,272,189
.11
LG3 15-5 Suppose that the 2013 actual and 2014 projected financial statements for AFS are initially
shown as follows. In these tables, sales are projected to rise by 14 percent in the coming
year, and the components of the income statement and balance sheet that are expected to
increase at the same 14 percent rate as sales are indicated by green type. Assuming that
AFS wants to cover the AFN with half equity and half long-term debt, what amount of
additional funds will be needed if debt carries a 9 percent interest rate?
$855,000.0
Depreciation $1,200,000 $1,368,000 Inv $800,000
$912,000.0
0
EBIT $1,300,000 $1,482,000
Current
Assets $1,690,000
$1,926,600
.00
$5,700,000
N/P $500,000 $500,000
Dividends $344,100 $344,100 Accruals $375,000 $427,500
Retained $344,100 $442,705
Current
Liab $1,225,000 $1,326,500
LTD $1,200,000 $1,396,197
Equity $4,265,000 $4,903,903
TD +E $6,690,000 $7,626,600
integrated mini-case
Effect of Capital Structure on AFN
Suppose that the 2013 actual and 2014 projected financial statements for your firm are initially
shown as follows. In these tables, sales are projected to rise by 18 percent in the coming year,
and the components of the income statement and balance sheet that are expected to increase at
the same 18 percent rate as sales are indicated by green type. Assuming that your firm has to pay
9 percent interest on debt, what would the AFN be if needed capital was to be raised entirely
from equity?
How would your answer change if the entire AFN was to be raised from long-term debt? And
what does this imply about the relationship between the sources of funding and the amount
needed?
Income Statement Balance Sheet
2013 Actual 2014 Forecast 2013 actual 2014 Forecast
Sales $10,000,000 $11,800,000 Assets
Costs except depreciation 5,200,000 6,136,000 Cash $ 540,000 $ 637,200
Depreciation 800,000 944,000 Accounts receivable 800,000 944,000
EBIT $ 4,000,000 $ 4,720,000 Inventories 1,600,000 1,888,000
Interest 181,530 181,530 Total current assets $ 2,940,000 $ 3,469,200
EBT $ 3,818,470 $ 4,538,470 Net plant and equipment 7,500,000 8,850,000
Taxes (40%) 1,527,388 1,815,388 Total assets $10,440,000 $12,319,200
Net income $ 2,291,082 $ 2,723,082
Liabilities and Equity
Common dividends $2,000,000 $2,000,000 Accounts payable $ 557,000 $ 657,260
Addition to retained earnings $ 291,082 $ 723,082 Notes payable 750,000 750,000
Accruals 1,200,000 1,416,000
Total current liabilities $ 2,507,000 $ 2,823,260
Long-term debt 2,017,000 2,017,000
Total debt $ 4,524,000 $ 4,840,260
Common stock $ 5,250,000 $ 5,250,000
Retained earnings 666,000 1,389,082
Total common equity $ 5,916,000 $ 6,639,082
Total liabilities and equity $10,440,000 $11,479,342
If the ANF is funded entirely with equity, the financial statements will be:
Income Statement Balance Sheet
2013 Actual 2014 Forecast 2013 Actual 2014 Forecast
Accruals 1,200,000 1,416,000
Total current liabilities $ 2,507,000 $ 2,823,260
Long-term debt 2,017,000 2,017,000
Total debt $ 4,524,000 $ 4,840,260
Common stock $ 5,250,000 $ 6,089,858
Retained earnings 666,000 1,389,082
Total common equity $ 5,916,000 $ 7,478,940
Total liabilities and equity $10,440,000 $12,319,200
Common stock = $5,250,000 + $839,858 = $6,089,858
If the AFN is funded entirely with debt:
Income Statement Balance Sheet
2013 Actual 2014 Forecast 2013 Actual 2014 Forecast
Sales $10,000,000 $11,800,000 Assets
Costs except depreciation 5,200,000 6,136,000 Cash $ 540,000 $ 637,200
Depreciation 800,000 944,000 Accounts receivable 800,000 944,000