(12–7)

Forecasted Statements and Ratios Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton’s balance sheet as of December 31, 2010, is shown here (millions of dollars):

Cash $ 3.5 Accounts payable $ 9.0 Receivables 26.0 Notes payable 18.0 Inventories 58.0 Accruals 8.5 Total current assets $ 87.5 Total current liabilities $ 35.5 Net fixed assets 35.0 Mortgage loan 6.0 Common stock 15.0 Retained earnings 66.0 Total assets $122.5 Total liabilities and equity $122.5 Sales for 2010 were $350 million and net income for the year was $10.5 million, so the firm’s profit margin was 3.0%. Upton paid dividends of $4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio remain constant in 2011.

a. If sales are projected to increase by $70 million, or 20%, during 2011, use the AFN equation to determine Upton’s projected external capital requirements.

b. Using the AFN equation, determine Upton’s self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds?

c. Use the forecasted financial statement method to forecast Upton’s balance sheet for December 31, 2011. Assume that all additional external capital is raised as a bank loan at the end of the year and is reflected in notes payable (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton’s profit margin and dividend payout ratio will be the same in 2011 as they were in 2010. What is the amount of notes payable reported on the 2011 forecasted balance sheets? (Hint: You don’t need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2011 addition to retained earnings for the balance sheet.)