530 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management
Suppose that in 2009, sales increase by 10% over 2008 sales. The firm currently has
100,000 shares outstanding. It expects to maintain its 2008 dividend payout ratio and
believes that its assets should grow at the same rate as sales. The firm has no excess
capacity. However, the firm would like to reduce its Operating costs/Sales ratio to 87.5%
and increase its total debt ratio to 30%. (It believes that its current debt ratio is too low
relative to the industry average.) The firm will raise 30% of 2009 forecasted total debt as
notes payable, and it will issue long-term bonds for the remainder. The firm forecasts
that its before-tax cost of debt (which includes both short-term and long-term debt) is
12.5%. Assume that any common stock issuances or repurchases can be made at the
firm’s current stock price of $45.
a. Construct the forecasted financial statements assuming that these changes are made.
What are the firm’s forecasted notes payable and long-term debt balances? What is
the forecasted addition to retained earnings?
b. If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at
what growth rate in sales will the additional financing requirements be exactly zero?
In other words, what is the firm’s sustainable growth rate? (Hint: Set AFN equal to
zero and solve for g.)
EXCESS CAPACITY Krogh Lumber’s 2008 financial statements are shown here.Krogh Lumber: Balance Sheet as of December 31, 2008 (Thousands of Dollars)
Cash $ 1,800 Accounts payable $ 7,200
Receivables 10,800 Notes payable 3,472
Inventories 12,600 Accrued liabilities 2,520
Total current assets $25,200 Total current liabilities $13,192
Mortgage bonds 5,000
Net fixed assets 21,600 Common stock 2,000
Retained earnings 26,608
Total assets $46,800 Total liabilities and equity $46,800Krogh Lumber: Income Statement for December 31, 2008
(Thousands of Dollars)
Sales $36,000
Operating costs including depreciation 30,783
Earnings before interest and taxes $ 5,217
Interest 1,017
Earnings before taxes $ 4,200
Taxes (40%) 1,680
Net income $ 2,520
Dividends (60%) $ 1,512
Addition to retained earnings $ 1,008a. Assume that the company was operating at full capacity in 2008 with regard to all
items except fixed assets; fixed assets in 2008 were being utilized to only 75% of
capacity. By what percentage could 2009 sales increase over 2008 sales without the
need for an increase in fixed assets?
b. Now suppose 2009 sales increase by 25% over 2008 sales. Assume that Krogh cannot
sell any fixed assets. All assets other than fixed assets will grow at the same rate as
sales; however, after reviewing industry averages, the firm would like to reduce its
Operating costs/Sales ratio to 82% and increase its debt ratio to 42%. The firm will
maintain its 60% dividend payout ratio, and it currently has 1 million shares
outstanding. The firm plans to raise 35% of its 2009 total debt as notes payable, and it
will issue bonds for the remainder. Its before-tax cost of debt is 11%. Any stock
issuances or repurchases will be made at the firm’s current stock price of $40.
Develop the projected financial statements as shown in Table 16-2. What are the
balances of notes payable, bonds, common stock, and retained earnings?