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, 2021, is shown here (millions of dollars):

Sales for 2021 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 was 25%, 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 2022. 

a. If sales are projected to increase by $70 million, or 20%, during 2022, 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, 2022. Assume that all additional external capital is raised as a line of credit at the end of the year. Assume Upton’s profit margin and dividend payout ratio will be the same in 2022 as they were in 2021. What is the amount of the line of credit reported on the 2022 forecasted balance sheets?

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Cash Receivables Inventories Total current assets Net fixed assets Total assets $3.5 26.0 58.0 $ 87.5 35.0 $122.5 Accounts payable Notes payable Line of credit Accruals $9.0 18.0 0 8.5 Total current liabilities $35.5 Mortgage loan 6.0 Common stock 15.0 Retained earnings 66.0 Total liabilities and equity $122.5