# Case 10 Problems and Essays

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```					                              Case 10 Problems and Essays

Problems:
1. Baxter Box Company’s balance sheet showed the following amounts as of December
31st

Cash                         \$10              Accounts Payable       \$15
Accounts Receivable          \$40              Notes Payable          \$ 5
Inventories                  \$50              Long-term Debt         \$20
Fixed Assets                 \$100             Common Stock           \$20
__________             Retained Earnings      \$120
Total Assets                 \$200             Total Liab. & Eq.      \$200

Last year the firm’s sales were \$2,000, and it had a profit margin of 10% and a dividend
payout ratio of 50%. Baxter Box operated its fixed assets at 70% of capacity during the
year. The company expects to increase next year’s sales by 37.5%, to \$2,750, but the
profit margin is expected to fall to 3% and the dividend payout ratio is expected to rise to
60%. What is Baxter Box’s additional funds needed using the AFN formula for next
year?

How much can they produce without an increase in fixed assets?
.7/2000 = 1.0/ X
So .7X = 2000 and X = 2857 Therefore they can support the increase to \$2,750 with the
current asset level and A* = current assets only.

A*/ So * Chg in Sales – L*/ So * Chg in Sales – M*S1*RR = AFN
100/2000 * 750 – 15/2000 * 750 - .03*2750*.40 = 37.5 – 5.625 – 33 = -1.125 an excess
of funds

2. Kenney Corporation recently reported the following income statement, for 2002
(numbers are in millions of dollars):

Sales                  \$7,000          \$7,700
Operating costs        \$3,000           3,300
EBIT                   \$4,000           4,400
Interest                  200             200
EBT                    \$3,800           4,200
Taxes (40%)             1,520           1,680
Net Income             \$2,280           2,520

The company forecasts that its sales will increase by 10% in 2003 and its operating costs
will increase in proportion to sales. The company’s interest expense is expected to
remain at \$200 million, and the tax rate will remain at 40%. The company plans to pay
out 50% of net income as dividends, the other 50% will be additions to retained earnings.
What is the forecasted addition to retained earnings for 2003?

.50 * 2520 = 1,260 = Additions to Retained Earnings
3.
Computron Industries

BALANCE SHEETS                     2002              2003                Pro Forma
Assets
Cash                            \$115,200           \$104,000               130,000
Accounts Receivable              702,400            804,000              1,443,750
Inventories                     1,430,400          1,672,000             2,406,250
Total Current Assets     2,248,000          2,580,000             3,980,000

Gross Fixed Assets               982,000           1,054,000             1,204,000
Less: Accum Depreciation         292,400            332,400               392,400
Net Fixed Assets                 689,600            721,600               811,600
Total Assets     2,937,600          3,301,600             4,791,600

Liabilities and Equity
Accounts Payable                 291,200            350,400               667,808
Notes Payable                    400,000            450,000               450,000
Accruals                         272,000            280,000               350,000
Total Current Liabilities    963,200           1,080,400             1,467,808

Long-Term Debt                   646,864            849,224               849,224
Common Stock                     920,000            920,000               920,000
Retained Earnings                407,536            451,976               515,678
Total Equity   1,327,536          1,371,976             1,435678
Total Liabilities and Equity    2,937,600          3,301,600             3,752,710

INCOME STATEMENT
Sales                           \$6,864,000        \$7,700,000             9,625,000
Cost of goods sold               5,728,000         6,500,000             8,125,000
Other expenses                    680,000           860,600              1,075,750
Depreciation                      37,800             40,000                60,000
Total Operating Costs     6,445,800         7,400,600             9,260750
EBIT       418,200           299,400               364,250
Interest Expense                  125,000           152,000               152,000
EBT       293,200           147,400               212,250
Taxes (40%)                       117,280            58,960                84,900
Net Income                        175,920            88,440               127,350

Dec. 31, Stock Price              \$8.50                         \$6.00
Number of Shares                 100,000                       100,000

Using these financial statements and the following Financial Data, project Computron’s
need for funds in 2004 using Pro Forma Financial Statements
.
Financial Data:

1.   Sales are expected to grow by 25%.
2.   Computron would like to try to hold Accounts Receivable at 15% of sales.
3.   Inventories will be held at 25% of sales.
4.   The will purchase new equipment that costs \$150,000 and book \$60,000 in
depreciation for the coming year.
5.   Accounts payable will represent 30 days of average daily cost of goods sold.
6.   Long term debt is not expected to change.
7.   Any spontaneous accounts not specifically mentioned can be expected to change
in proportion to sales.
8.   Dividend Payout Ratio will remain constant at last year’s rate.

AFN = 4,791,600 - 3,752,710 = \$1,038,890

4. Use the following information to create Pro Forma Financial Statements and project
the additional funds needed using these financial statements and the financial data that
follows.
Bo Knows Profit Corporation
Income Statement for Year Ending 2003

Pro Forma
Sales                                                   \$8,800               10,560
Less: Costs                                          5,600                6,720
Depreciation                                              900                  840
EBIT                                                 2,300                3000
Less: Interest                                         350                 350
EBT                                                  1,950                2,650
550                  747
Net Income                                              \$1,400                1,903

Bo Knows Profit Corporation
Balance Sheets for End of Years 1998, 1999

2003     2002                           2003     2002
132        Cash                   110      170     Accounts Payable       120      135      144
1,584        Accounts Receivable    700      500     Notes Payable         1,400    1,200    1400
2,112        Inventory             1,000    1,240    Current Liabilities   1,520    1,335    1,544
3,828        Current Assets        1,810    1,910    Long-term Debt        2,620    2,005    2,620
3,160        Fixed Assets          3,500    2,000    Common Stock           200      100      200
(50 shares)
Retained Earnings      970      470     1,650
6,988        Total Assets          5,310    3,910    Total Liab. &         5,310    3,910    6,014
Equity
AFN = 6,988 - 6,014 = \$974
Financial Data:
1. Assume that sales will grow by 20%.
2. Accounts Receivable will represent 15% of sales.
3. Inventory is expected to be 20% of sales.
4. Marble will purchase \$500 in fixed assets and book \$840 in depreciation.
5. All other spontaneous accounts will grow in proportion to sales.
6. Dividend payout ratio is expected to remain steady.

5. Splash Bottling’s December 31st balance sheet is given below:

Cash                         \$20            Accounts payable                      \$30
Accounts Receivable          \$50            Notes payable                         \$40
Inventory                    \$80            Accrued wages and taxes               \$30
Net fixed assets             \$150           Long-term debt                        \$60
Common equity                         \$140
Total assets                 \$300           Total Liab. & Equity                  \$300

Sales during the past year were \$200, and they are expected to rise by 50% to \$300
during the next year. Also, during last year fixed assets were being used to only 80%
capacity, so Splash could have supported \$200 of sales with fixed assets that were only
80% of last year’s actual fixed assets. Assume Splash’s profit margin will remain
constant at 5% and that the company will continue to pay out 60% of its earnings as
dividends. To the nearest whole dollar, what amount of nonspontaneous, additional
funds will be needed during the next year? [Note: use the AFN formula.]

Can they support the increase in sales with existing fixed assets?
.8 / 200 = 1.0 / X
.8X = 200
X = 250
So they need to add assets to get to 300 in sales. How much?
1/250 = x/300
X = 300/250 = 1.2 This implies we need to increase net fixed assets by 20% to get to
\$300 in sales or .20 * 150 = 30

We can now use the AFN formula and add a \$30 extra for NFA to whatever other assets
we need.

AFN = 30 + 150/200 * 100 – 60/200 * 100 - .05*300*.40 = 105 – 30 – 6 = \$69

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