Chapter 3 Problem 7
Note: Manual calculation mode is on. You must press F9 key to calculate.
Facts and Assumptions
Year 2014 2015 2016
Net sales 20,613$
Growth rate in sales 25% 30%
Cost of goods sold/net sales 86% 86%
Gen., sell,, and admin. expenses/net sales 12% 11%
Long-term debt 760$ 660$ 560$
Current portion long-term debt 100$ 100$ 100$
Interest rate 10% 10%
Tax rate 45% 45%
Dividend/earnings after tax 50% 50%
Current assets/net sales 29% 29%
Net fixed assets 280$ 270$
Current liabilities/net sales 14.5% 14.4%
Owners’ equity 1,730$
INCOME STATEMENT
Year 2014
Forecast
2015
2016
Net sales 25,766$
Cost of good sold 22,159
Gross profit 3,607
Gen., sell,, and admin. exp. 3,092
Interest expense 231
Earnings before tax 285
Tax 128
Earnings after tax 156
Dividends paid 78
Additions to retained earnings 78
BALANCE SHEET
Current assets 7,472$
Net fixed assets 280
Total assets 7,752
Current liabilities 3,736
Long-term debt 660
Equity 1,808
Total liabilities and shareholders’ equity 6,204
EXTERNAL FUNDING REQUIRED 1,548$
Chapter 3 Problem 13
13. Below are the 2014 financial statements for Aquatic Supplies Co. Also appearing are management’s forecasts for how individual financial statement items will vary in the
future. The company expects sales to grow 12% next year. Aquatic Supplies finances all of its needs with 10-year long-term debt at 10% interest, while excess cash at the end
of the year is added to the cash balance.
a. Prepare a spreadsheet to estimate Aquatic Supplies ‘s 2015 need for external funding assuming long-term debt and interest expense remain at their 2011 levels.
b. Modify your spreadsheet forecast in part (a) to capture the interdependence between the loan and interest expense. That is, switch your spreadsheet to “manual calculation”
and include the necessary loan and added interest expense in your forecast.
c. Is the required loan in part (b) equal to the required loan you calculated in part (a)? Why are they different?
d. Perform a sensitivity analysis of Aquatic Supplies Co.’s external financing needs as determined in part (b). Assume sales grow at 17% instead of 12%. How much does the
bank loan increase as sales go from 12% to 17%?
e. Perform a scenario analysis on the company’s projection as determined in part (b). Assume sales grow 20%, the cost of goods sold is 38% of sales, inventory falls from 5%
of sales to 3%, and accounts receivable fall from 13% of sales to 10%. What happens to the loan need in this scenario relative to your answer in part (b)?
f. Return now to the original assumptions and extend your projections in part (b) through 2019. Continue to assume that all external funding needs will be met with debt at 10%
interest and any excess cash will add to the company’s cash balance. What are your projected values for long-term debt and cash and equivalents in 2019?
g.
Perform a scenario analysis on your 5-year projection in part (f). Assume growth in sales is 10%, the cost of goods sold is 41% of sales, and selling, general and
administrative expenses are 50% of sales. What are your projected values for long-term debt and cash balance in 2019?
2014
Sales 582.762$ 12% growth in sales
Cost of Goods Sold 240.828 39% percentage of sales
Gross Profit 341.934
Selling, General, & Administrative Exp. 257.507 49% percentage of sales
Operating Income Before Deprec. 84.427
Depreciation,Depletion,&Amortization 25.221 30% percentage of net PP&E
Operating Profit 59.206
Interest Expense 16.430 initially constant
Pretax Income 42.776
Total Income Taxes 14.971 35%
percentage of earnings before taxes
Net income 27.805$
ASSETS
Cash & Equivalents 7.152$ 2% minimum cash balance as % of sales
Account Receivable 70.538 13% percentage of sales
Inventories 39.033 5% percentage of sales
Prepaid Expenses 9.339 no change
Other Current Assets 27.076 6% percentage of sales
Total Current Assets 153.138
Net Plant, Property & Equipment 81.648 15% percentage of sales
Intangibles 9.415 no change
Other Assets 24.642 5% percentage of sales
TOTAL ASSETS 268.843$
LIABILITIES
Accounts Payable 36.951$ 6% percentage of sales
Accrued Expenses 31.206 5% percentage of sales
Other Current Liabilities 3.663 no change
Total Current Liabilities 71.820
Long Term Debt 157.720 initially constant
Accrued wages 21.418 3% percentage of sales
Total Liabilities 250.958
EQUITY
Common Stock 1.702 no change
Capital Surplus 55.513 no change
Retained Earnings 118.729
Less: Treasury Stock 158.059 no change
TOTAL EQUITY 17.885
TOTAL LIABILITIES & EQUITY 268.843$
Aquatic Supplies Co.
Income Statement (in $ millions)
Assumptions
Balance Sheet (in $ millions)
no dividends paid so all