Build a Model Problem 11/26/18
Chapter: 12 Note to authors. Change income statement and balance sheets to be values (not formulas) when doing problem for students.
Problem: 10
Key Input Data: Used in the
forecast
Tax rate 25%
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%
Income Statements:
(December 31, in thousands of dollars)
Sales $455,150 Growth 6.0% $482,459 $482,459
Expenses (excluding depr. & amort.) $386,878 85.0% % of sales 85.0% $410,090 $410,090
Depreciation and Amortization $14,565 4.0% % of fixed assets 4.0% $15,439 $15,439
EBIT $53,708 $56,930 $56,930
Interest expense on long-term debt $11,880 Interest rate x average debt during year $13,200 $13,200
Interest expense on line of credit $0 $0 $0
EBT $41,828 $43,730 $43,730
Taxes (25%) $10,457 $10,933 $10,933
Net Income $25,097 $32,798 $32,798
Common dividends (regular dividends) $12,554 Growth 8.00% $13,558 $13,558
Special dividends Zero in preliminary forecast $0 $0
Addition to retained earnings $12,543 $19,239 $19,239
Balance Sheets
(December 31, in thousands of dollars)
Assets:
Cash $18,206 4.0% % of sales 4.00% $19,298 $19,298
Accounts Receivable $100,133 22.0% % of sales 22.00% $106,141 $106,141
Inventories $45,515 10.0% % of sales 10.00% $48,246 $48,246
Total current assets $163,854 $173,685 $173,685
Fixed assets $364,120 80.0% % of sales 80.00% $385,967 $385,967
Total assets $527,974 $559,652 $559,652
Liabilities and equity
Accounts payable $31,861 7.0% % of sales 7.00% $33,772 $33,772
Accruals $27,309 6.0% % of sales 6.00% $28,948 $28,948
Line of credit $0 Zero in preliminary forecast $0 $8,889
Total current liabilities $59,170 $62,720 $71,609
Long-term debt $120,000 Previous $120,000 $120,000
Total liabilities $179,170 $182,720 $191,609
Common stock $60,000 Previous $60,000 $60,000
Retained Earnings $106,745 Previous + Addition to retained earnings $125,984 $125,984
Total common equity $166,745 $185,984 $185,984
Total liabilities and equity $345,914 $368,703 $377,592
Identify Financing Deficit or Surplus
Increase in spontaneous liabilities (accounts payable and accruals) $3,550
+ Increase in long-term bonds, preferred stock and common stock
$0
+ Net income (in preliminary forecast) minus regular common dividends $19,239
Increase in financing
$22,789
− Increase in total assets $31,678
Amount of financing deficit or surplus: -$8,889
If deficit in financing (negative), show the amount for the line of credit $8,889
If surplus in financing (positive), show the amount of the special dividend $0
Required ine of credit $8,889 Note: we copied values from H99:H100) when sales growth in G51 = 6%.
Special dividends $0
Required ine of credit $0 Note: we copied values from H99:H100) when sales growth in G51 = 3%.
Special dividends $3,967
2020 Final forecast
(includes special
dividend or LOC)
2020 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.
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.
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?
Start with the partial model in the file Ch12 P10 Build a Model.xlsx on the textbook’s Web site, which contains the 2019
financial statements of Zieber Corporation. Forecast Zeiber’s 2020 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 2020 as in 2019. (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. (7) The tax rate is 25%. 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.
Forecasting basis
2019
Historical
ratios
2020 Input
ratios
2019
Forecasting basis
2019
Historical
ratios
2020 Input
ratios
2019