Solution to Build a Model Problem
Chapter: 12
Problem: 10
Key Input Data: Used in the
forecast
Tax rate 40%
Dividend growth rate 8%
Rate on notes payable-term debt, rstd 9%
Rate on long-term debt, rd11%
Rate on line of credit, rLOC 12%
Start with the partial model in the file Ch12 P10 Build a Model.xls x on the textbook’s Web site, which contains the 2016
financial statements of Zieber Corporation. Forecast Zeiber’s 2017 income statement and balance sheets. Use the
following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales, depreciation to fixed assets, cash to
sales, accounts receivable to sales, and inventories to sales will be the same in 2017 as in 2016. (3) Zeiber will not issue
any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt and the interest expense on long–
term debt is based on the average balance during the year. (5) No interest is earned on cash. (6) Regular dividends grow
at an 8% rate. (6) Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by
drawing on a line of credit with an interest rate of 12%. Assume that any draw on the line of credit will be made on the
last day of the year, so there will be no additional interest expense for the new line of credit. If surplus funds are
available, pay a special dividend.
EBIT $53,708
Interest expense on long-term debt $11,880 Interest rate x average debt during year
Interest expense on line of credit $0
EBT $41,828
Taxes (40%) $16,731
Net Income $25,097
Common dividends (regular dividends) $12,554 Growth 8.00%
Special dividends Zero in preliminary forecast
Addition to retained earnings $12,543
Balance Sheets
(December 31, in thousands of dollars)
Assets:
Cash $18,206 4.0% % of sales 4.00%
Accounts Receivable $100,133 22.0% % of sales 22.00%
Inventories $45,515 10.0% % of sales 10.00%
Total current assets $163,854
Fixed assets $182,060 40.0% % of sales 40.00%
Total assets $345,914
Liabilities and equity
Accounts payable $31,861 7.0% % of sales 7.00%
Accruals $27,309 6.0% % of sales 6.00%
Line of credit $0 Zero in preliminary forecast
Total current liabilities $59,170
Long-term debt $120,000 Previous
Total liabilities $179,170
Common stock $60,000 Previous
Retained Earnings $106,745 Previous + Addition to retained earnings
Total common equity $166,745
Total liabilities and equity $345,914
Identify Financing Deficit or Surplus
Increase in spontaneous liabilities (accounts payable and accruals)
+ Increase in long-term bonds, preferred stock and common stock
+ Net income (in preliminary forecast) minus regular common dividends
Increase in financing
− Increase in total assets
Amount of financing deficit or surplus:
If deficit in financing (negative), show the amount for the line of credit
If surplus in financing (positive), show the amount of the special dividend
Required ine of credit $4,525
Special dividends $0
a. What are the forecasted levels of the line of credit and special dividends?
b. Now assume that the growth in sales is only 3% (do this by changing the growth rate in Cell G51). What are the
forecasted levels of line of credit and special dividends?
Forecasting basis
2016
Historical
ratios
2017 Input
ratios
2016
Required ine of credit $0
Special dividends $3,111
b. Now assume that the growth in sales is only 3% (do this by changing the growth rate in Cell G51). What are the
forecasted levels of line of credit and special dividends?
7/16/15
$482,459 $482,459
$410,090 $410,090
$15,439 $15,439
Start with the partial model in the file Ch12 P10 Build a Model.xls x on the textbook’s Web site, which contains the 2016
financial statements of Zieber Corporation. Forecast Zeiber‘s 2017 income statement and balance sheets. Use the
following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales, depreciation to fixed assets, cash to
sales, accounts receivable to sales, and inventories to sales will be the same in 2017 as in 2016. (3) Zeiber will not issue
any new stock or new long–term bonds. (4) The interest rate is 11% for long–term debt and the interest expense on long-
term debt is based on the average balance during the year. (5) No interest is earned on cash. (6) Regular dividends grow
at an 8% rate. (6) Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by
drawing on a line of credit with an interest rate of 12%. Assume that any draw on the line of credit will be made on the
last day of the year, so there will be no additional interest expense for the new line of credit. If surplus funds are
available, pay a special dividend.
2017 Preliminary
forecast (doesn’t
include special
dividend or LOC)
2017 Final forecast
(includes special
dividend or LOC)
a. What are the forecasted levels of the line of credit and special dividends? (Hints: Create a column showing the ratios
for the current year; then create a new column showing the ratios used in the forecast. Also, create a preliminary
forecast that doesn‘t include any new line of credit or special dividends. Identify the financing deficit or surplus in this
preliminary forecast and then add a new column that shows the final forecast that includes any new line of credit or
special dividend.)
Begin by calculating the appropriate historical ratios in Column E. Then put these ratios and any other input ratios in
Column G.
Forecast the preliminary balance sheets and income statements in Column H. Don‘t include any line of credit or special
dividend in the preliminary forecast.
After completing the preliminary forecast of the balance sheets and income statement, go to the area below the
preliminary forecast and identify the financing deficit or surplus. Then use Excel’s IF statements to specify the amount
of any new line of credit OR special dividend (you should not have a new line of credit AND a special dividend, only one
or the other).
After specifying the amounts of the special dividend or line of credit, create a second column (I) for the final forecast
next to the column for the preliminary forecast (H). In this final forecast, be sure to include the effect of the special
dividend or line of credit.
$56,930 $56,930
$13,200 $13,200
$0 $0
$43,730 $43,730
$17,492 $17,492
$26,238 $26,238
$13,558 $13,558
$0 $0
$12,680 $12,680
$19,298 $19,298
$106,141 $106,141
$48,246 $48,246
$173,685 $173,685
$192,984 $192,984
$366,669 $366,669
$33,772 $33,772
$28,948 $28,948
$0 $4,525
$62,720 $67,245
$120,000 $120,000
$182,720 $187,245
$60,000 $60,000
$119,424 $119,424
$179,424 $179,424
$362,144 $366,669
$3,550
$0
$12,680
$16,230
$20,755
-$4,525
$4,525
$0
Note: we copied values from H99:H100) when sales growth in G51 = 6%.
a. What are the forecasted levels of the line of credit and special dividends?
b. Now assume that the growth in sales is only 3% (do this by changing the growth rate in Cell G51). What are the
forecasted levels of line of credit and special dividends?
2017 Preliminary
forecast (doesn’t
include special
dividend or LOC)
2017 Final forecast
(includes special
dividend or LOC)
Note: we copied values from H99:H100) when sales growth in G51 = 3%.
b. Now assume that the growth in sales is only 3% (do this by changing the growth rate in Cell G51). What are the
forecasted levels of line of credit and special dividends?