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CHAPTER 17 – FINANCIAL PLANNING & CONTROL Magee computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Magee’s balance sheet as of December 31, 2009, is shown here ($ Millions): Cash Receivables Inventories Total Current Assets Net Fixed assets

Total Assets

$3.5 26.0 58.0 87.5 35.0

$122.5

Accounts payable Notes payable Accruals Accruals Total Current Liabilities Long-term bonds Common stock Retained earnings Total Liabilities and Equity

$ 9.0 18.0 8.5 $ 35.5 6.0 15.0 66.0 $ 122.5

Sales for 2009 were $350 million, while net income for the year was $10.5 million. Magee paid dividends of $4.2 million to common stockholders. The firm is operating at full capacity. Assume that all the ratios remain constant. If sales are projected to increase by 70 million, or 20 percent, during 2005, use the Additional Funds Needed equation to determine Magee’s projected external capital requirements. Assume Magee’s profit margin and dividend payout ratio remain constant. a)

Construct Magee’s pro forma balance sheet for December 31, 2010. Assume that all external capital requirements are met by bank loans and are reflected in notes payable. Assume Magee’s profit margin and dividend payout ratio remain constant. Do not consider any financing feedback effects.

Following are Noso Textiles 2009 financial statements. Noso Textiles: Balance Sheet as of December 31, 2009 ($ Thousands) Cash Receivables Inventories Total Current Assets Net Fixed Assets

Total Assets

$ 1,080 6,480 9,000 $16,560 12,600

Accounts payable Accruals Notes payable Total current liabilities Long-term bonds Common stock Retained earnings $29,160 Total Liabilities and Equity

$ 4,320 2,880 2,100 $ 9,300 3,500 3,500 12,860 $29, 160

Noso Textiles: Income Statement for December 31, 2009 ($ Thousands) Sales Operating costs Earnings before interest and taxes Interest Earnings before Taxes Taxes (40%) Net income Dividends (45%) Addition to retained earnings

a)

$ 36,000 (32,440) $ 3,560 (560) $ 3,000 (1,200) $ 1,800 $ 810 $ 990

Suppose 2010 sales are projected to increase by 15 percent over 2009 sales. Determine the additional funds needed. Assume that the company was operating at fill capacity in 2009, that it cannot sell of any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Use the projected balance sheet method to develop a pro forma balance sheet and income statement for December 31, 2010. (Do not incorporate any financing feedback effects. Use the pro forma income statement to determine the addition to retained earnings.)

b)

Use the financial statements developed in part a to incorporate the financing feedback as a result of the addition to notes payable. (That is, do the next financial statement iteration.) For the purpose of this part, assume that the notes payable interest rate is 10 percent. What is the AFN for this iteration?

The 2009 balance sheet and income statement for the woods company are shows here:

Woods Company: Balance Sheet as of December 31, 2009 ($ Thousands) Cash Receivables Inventories Total Current Assets Net Fixed Assets

Total Assets

$ 80 240 720 $1,040 3,200

Accounts payable Accruals Notes payable Total current liabilities Long-term bonds Common stock Retained earnings $4,240 Total Liabilities and Equity

$ 160 40 252 $ 400 1,244 1605 939 $4,240

Woods Company: Income Statement for December 31, 2009 ($ Thousands) Sales Operating costs Earnings before interest and taxes Interest Earnings before taxes Taxes (40%) Net income Per Share Data Common stock price Earnings per share Dividends per share

a)

$ 8,000 (7,450) $ 550 (150) $ 400 (160) $ 240 $ 16.96 $ 1.60 $ 1.04

The firm operated full capacity at 2009. It expects sales to increase by 20 percent during 2010 and expects 2010 dividends per share to increase to $1.10. Use the projected balance sheet method to determine how much outside financing is required, developing the firm’s pro forma much outside financing is required, developing the firm’s pro forma balance sheet and income statement, and use AFN as the balance items.

b)

If the firm must maintain a current ratio of 2.3 and a debt ratio of 40 percent, how much financing, after the first pass, will be obtained using notes payable, long term debt, and common stock?

c)

Construct the second-pass financial statements incorporating financing feedbacks, using the ratio in part b. Assume that the interest rate on debt averages 10 percent.