Use a spreadsheet model to forecast the financial statements in Problems 17-13 and 17-14.

Problems 17-14

Krogh Lumber’s 2021 financial statements are shown here.

a. Assume that the company was operating at full capacity in 2021 with regard to all items except fixed assets; fixed assets in 2021 were being utilized to only 75% of capacity.
By what percentage could 2022 sales increase over 2021 sales without the need for an increase in fixed assets?

b. Now suppose 2022 sales increase by 25% over 2021 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 total liabilities-to-assets 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 2022 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11%. Any stock issuances or repurchases will be made at the firm’s current stock price of $40.
Develop Krogh’s projected financial statements like those shown in Table 17.2. What are the balances of notes payable, bonds, common stock, and retained earnings

Table 17.2

Problems 17-13

Morrissey Technologies Inc.’s 2021 financial statements are shown here.

Suppose that in 2022, sales increase by 10% over 2021 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2021 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 liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2022 forecasted interest-bearing 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- 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 6.25% 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?

Transcribed Image Text:

Krogh Lumber: Balance Sheet as of Cash $ 1,800 10,800 12,600 $25,200 Receivables Inventories Total current assets Net fixed assets Total assets December 31, 2021 (thousands of dollars) Accounts payable $ 7,200 Accrued liabilities Notes payable Total current liabilities Mortgage bonds 21,600 Common stock Retained earnings $46,800 Total liabilities and equity 2,520 3,472 $13,192 5,000 2,000 26,608 $46,800