Chapter 04: Financial Forecasting
4-26. Solution:
Archer Electronics
Cash Receipts Schedule
April May June July Aug. Sept.
4-26. (Continued)
Archer Electronics
Cash Payments Schedule
April May June July Aug. Sept.
month after purchase—
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Chapter 04: Financial Forecasting
80%)
Labor expense (15% of
sales)
48,750 48,750 51,000 57,000
4-26. (Continued)
Archer Electronics
Cash Budget
June July August September
(Sold) — — (236,500)
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Chapter 04: Financial Forecasting
*Cumulative Marketable Sec. (Aug) $236,500
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Chapter 04: Financial Forecasting
27. Percent-of-sales method (LO3) Owen’s Electronics has nine operating plants in seven
Southwestern states. Sales for last year were $100 million, and the balance sheet at
year-end is similar in percentage of sales to that of previous years (and this will continue in
the future). All assets (including fixed assets) and current liabilities will vary directly with
sales. The firm is working at full capacity.
Balance Sheet
(in $ millions)
Assets Liabilities and Stockholders’ Equity
Cash…………………………..….…….. $ 7 Accounts payable….….……......... $20
Accounts receivable….…............ 25 Accrued wages….…….…….……... 7
Inventory……………………………… 28 Accrued taxes……………………….. 13
Current assets…….…….…….…... $60 Current liabilities………….….….. $40
Fixed assets…………………………… 45 Notes payable…………….…….…… 15
Common stock…………………….... 20
Retained earnings………………….. 30
Total assets……………………………. $105
Total liabilities and
stockholders’ equity………..……. $105
Owen’s has an after-tax profit margin of 10 percent and a dividend payout ratio of 45
percent.
If sales grow by 20 percent next year, determine how many dollars of new funds are needed
to finance the growth.
4-27. Solution:
Owen’s Electronics
At Full Capacity
Spontaneous Assets = Current Assets Fixed Assets+
Spontaneous Liabilities = Acc. Pay. + Accrued Wages & Taxes
( ) ( ) ( )
2
A L
Required New Funds = S S PS 1 D
S S
D – D – –
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of McGraw-Hill Education.
Chapter 04: Financial Forecasting
( ) ( )
S = 20% $100 mil.D
S = $20,000,000D
( ) ( )
( ) ( )
105 40
RNF (millions) = $20,000,000 $20,000,000 .10
100 100
$120,000,000 1 .45
– –
–
( ) ( ) ( ) ( )
1.05 $20,000,000 .40 $20, 000,000 .10 $120,000,000 .55= – –
$21,000, 000 $8,000,000 $6,600,000= – –
RNF= $6,400,000
28. Percent-of-sales method (LO3) The Manning Company has financial statements as shown
next, which are representative of the company’s historical average.
The firm is expecting a 35 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.
Using the percent-of-sales method, determine whether the company has external
financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be
found from the income statement.)
Income Statement
Sales………………………………..…….…….……… $250,000
Expenses………………………………………………. 192,000
Earnings before interest and taxes………….… $ 58,000
Interest…………………………………………..…….. 7,500
Earnings before taxes……………..….…….……. $ 50,500
Taxes……………………………………………………. 15,500
Earnings after taxes………………….….…….….. $ 35,000
Dividends………………………..…….…….………. $ 7,000
Balance Sheet
Assets Liabilities and Stockholders’ Equity
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of McGraw-Hill Education.
Chapter 04: Financial Forecasting
Cash……………………..….…….……... $ 8,500 Accounts payable………………….…. $ 26,400
Accounts receivable…………………. 63,000 Accrued wages…………………….….. 2,350
Inventory………………………………… 91,000 Accrued taxes….….…….…….……... 3,750
Current assets……………………..…. $162,500 Current liabilities……..…….……... $ 32,500
Fixed assets……………………….….… 85,000 Notes payable….…….……….…….… 7,500
Long-term debt……………………….. 17,500
Common stock………………..….…… 125,000
Retained earnings….…….………..... 65,000
Total assets…………………………..…. $247,500
Total liabilities and
stockholders’ equity………….……. $247,500
4-28. Solution:
Manning Company
Earnings after taxes $35,000
Profit margin = 14%
Sales $250,000
Dividends $7,000
Payout ratio = 20%
Earnings 35,000
= =
= =
Change in Sales 35% $250, 000 $87,500= ´ =
SpontaneousAssets Cash Acc. Rec. Inventory= + +
Spontaneous Liabilities Acc. Payable Accrued Wages & Taxes= +
( ) ( ) ( )
( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
A L
RNF=ΔS ΔS PS 1 D
2
S S
$162,500 $32,500
= $87,500 $87,500 .14 $337,500 1 .20
$250,000 $250,000
=.65 $87,500 .13 $87,500 .14 $337,500 .80
= $56,875 $11,375 $37,800
RNF = $7,700
– – –
– – –
– –
– –
The firm needs $7,700 in external funds.
Chapter 04: Financial Forecasting
29. Percent-of-sales method (LO3) Conn Man’s Shops, a national clothing chain, had sales of
$350 million last year. The business has a steady net profit margin of 9 percent and a
dividend payout ratio of 25 percent. The balance sheet for the end of last year is shown
next.
Balance Sheet
End of Year
(in $ millions)
Assets Liabilities and Stockholders’ Equity
Cash…………………………………………. $ 25 Accounts payable…………………….. $ 64
Accounts receivable………….…….…. 40 Accrued expenses…….…….……….. 31
Inventory……………………………….…. 82 Other payables………….…….…….… 45
Plant and equipment…………………... 133 Common stock……………….….……. 50
Retained earnings….…….………..... 90
Total assets…………………………….…. $280
Total liabilities and
stockholders’ equity……………… $280
The firm’s marketing staff has told the president that in the coming year there will be a
large increase in the demand for overcoats and wool slacks. A sales increase of 20 percent
is forecast for the company.
All balance sheet items are expected to maintain the same percent-of-sales relationships
as last year, except for common stock and retained earnings. No change is scheduled in the
number of common stock shares outstanding, and retained earnings will change as dictated
by the profits and dividend policy of the firm. (Remember the net profit margin is 9
percent.)
a. Will external financing be required for the company during the coming year?
b. What would be the need for external financing if the net profit margin went up to 10.5
percent and the dividend payout ratio was increased to 60 percent? Explain.
4-29. Solution:
Conn Man’s Shops
a.
2
A L
Required New Funds = S S PS 1 D
S S
This included fixed assets since the firm is at full capacity.
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Chapter 04: Financial Forecasting
S = 20% $350,000,000 = $70, 000,000D ´
( ) ( )
( ) ( )
( ) ( )
( ) ( )
280 140
RNF $70,000,000 $70,000,000 .09
350 350
$420, 000,000 1 .25
.80 $70,000,000 .40 $70,000,000 .09
$420, 000,000 .75
$56,000,000 $28,000,000 $28,350,000
= – –
–
= – –
= – –
( )
RNF = $350,000
A negative figure for required new funds indicates that an
b.
( )
RNF $56,000,000 $28,000,000 .105($420,000,000)
1 .6
$56,000,000 $28,000,000 $17,640,000
= –
–
´ –
= – –
= $10,360,000 external funds required
The net profit margin increased slightly, from 9 percent to
10.5 percent, which decreases the need for external funding.
overpowered the effect of the net profit margin change.