Problem 15, part f in Chapter 3 asks you to construct a five-year financial projection for Aquatic Supplies beginning in 2018. Based on your forecast or the suggested answer available through McGraw-Hill’s Connect, answer the following questions. 

AQUATIC SUPPLIES CO.
INCOME STATEMENT ($ millions)
	Actual	Forecast
	2017	2018	2019	2020	2021	2022
Sales	582.762	652.693	731.017	818.739	916.987	1,027.026
Cost of Goods Sold	240.828	254.550	285.096	319.308	357.625	400.540
Gross Profit	341.934	398.143	445.920	499.431	559.362	626.486
Selling, General, & Administrative Exp.	257.507	319.820	358.198	401.182	449.324	503.243
Operating Income Before Deprec.	84.427	78.323	87.722	98.249	110.038	123.243
Depreciation & Amortization	25.221	29.371	32.896	36.843	41.264	46.216
Operating Profit	59.206	48.952	54.826	61.405	68.774	77.027
Interest Expense	16.430	18.636	18.801	18.841	18.733	18.446
Pretax Income	42.776	30.316	36.025	42.564	50.041	58.581
Total Income Taxes	14.971	10.611	12.609	14.897	17.514	20.503
Net Income	27.805	19.705	23.416	27.667	32.527	38.078
BALANCE SHEET ($ millions)
ASSETS
Cash & Equivalents	7.152	13.054	14.620	16.375	18.340	20.541
Account Receivable	70.538	84.850	95.032	106.436	119.208	133.513
Inventories	39.033	32.635	36.551	40.937	45.849	51.351
Prepaid Expenses	9.339	9.339	9.339	9.339	9.339	9.339
Other Current Assets	27.076	39.162	43.861	49.124	55.019	61.622
Total Current Assets	153.138	179.039	199.403	222.211	247.756	276.366
Net Property, Plant, & Equipment	81.648	97.904	109.652	122.811	137.548	154.054
Intangible Assets	9.415	9.415	9.415	9.415	9.415	9.415
Other Assets	24.642	32.635	36.551	40.937	45.849	51.351
TOTAL ASSETS	268.843	318.993	355.022	395.374	440.568	491.186
LIABILITIES
Accounts Payable	36.951	39.162	43.861	49.124	55.019	61.622
Accrued Expenses	31.206	32.635	36.551	40.937	45.849	51.351
Other Current Liabilities	3.663	3.663	3.663	3.663	3.663	3.663
Total Current Liabilities	71.820	75.459	84.075	93.724	104.532	116.636
Long Term Debt	157.720	186.363	188.010	188.414	187.327	184.462
Accrued Wages	21.418	19.581	21.930	24.562	27.510	30.811
Total Liabilities	250.958	281.403	294.015	306.701	319.368	331.908
EQUITY
Common Stock	1.702	1.702	1.702	1.702	1.702	1.702
Capital Surplus	55.513	55.513	55.513	55.513	55.513	55.513
Retained Earnings	118.729	138.434	161.851	189.517	222.044	260.122
Less: Treasury Stock	158.059	158.059	158.059	158.059	158.059	158.059
Total Equity	17.885	37.590	61.007	88.673	121.200	159.278
TOTAL LIABILITIES & EQUITY	268.843	318.993	355.022	395.374	440.568	491.186

a. Calculate the company’s times-interest-earned ratio for each year from 2017 to 2022.

b. Calculate the percentage EBIT can fall before interest coverage dips below 1.0 for each year from 2017 to 2022.

c. Consulting Table 6.5 in the text, what bond rating would Aquatic Supplies have in 2017 if the rating was based solely on the firm’s interest coverage ratio?

d. Based on this rating, would a significant increase in financial leverage be a prudent strategy for Aquatic Supplies?

Data from Prob. 15 (f), Chapter 3

Return the dividend payout ratio to 40%. Now suppose Ottawa wants to make up any financing shortfall with increased debt. How high would the debt/equity ratio have to be to make up the difference?

Table 6.5

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(Median values for nonfinancial firms in 2016) AA AAA BBB BB CCC Times interest earned Debt to total assets (%) Return on invested capital (%) Number of companies Percent of sample companies (%) 15.7 3.3 20.9 6.7 4.7 1.1 NM 23.4 24.2 28.9 31.7 39.3 48.4 67.9 14.9 -8.3 10.4 6.9 5.2 4.2 -2.1 2 28 190 418 357 245 46 0.2 2.2 14.8 32.5 27.8 19.1 3.6