2. Problem 16.13

Problem 16-13

Additional funds needed

Morrissey Technologies Inc.'s 2014 financial statements are shown here.

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2014

Cash$180,000Accounts payable$360,000

Receivables360,000Notes payable56,000

Inventories720,000Accrued liabilities180,000

Total current assets$1,260,000Total current liabilities$596,000

Long-term debt100,000

Fixed assets1,440,000Common stock1,800,000

Retained earnings204,000

Total assets$2,700,000Total liabilities and equity$2,700,000

Morrissey Technologies Inc.: Income Statement for December 31, 2014

Sales$3,600,000

Operating costs including depreciation3,279,720

EBIT$320,280

Interest20,280

EBT$300,000

Taxes (40%)120,000

Net Income$180,000

Per Share Data:

Common stock price$45.00

Earnings per share (EPS)$1.80

Dividends per share (DPS)$1.08

Suppose that in 2015, sales increase by 20% over 2014 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2014 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 85% and increase its total debt-to-assets ratio to 30%. (It believes that its current debt ratio is too low relative to the industry average.) The firm will raise 30% of 2015 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%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45.

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? Round your answers to the nearest cent.

Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2015

20142015 Pro Forma

Sales$3,600,000 $

Operating costs (includes depreciation)3,279,720 $

EBIT$320,280 $

Interest expense20,280 $

EBT$300,000 $

Taxes (40%)120,000 $

Net Income$180,000 $

Dividends$

$

Addition to RE$

$

Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2015

20142015 Pro Forma

Cash$180,000 $

Accounts receivable360,000 $

Inventories720,000 $

Fixed assets1,440,000 $

Total assets$2,700,000 $

Payables + accruals$540,000 $

Short-term bank loans56,000 $

Total current liabilities$596,000 $

Long-term bonds100,000 $

Total debt$696,000 $

Common stock1,800,000 $

Retained earnings204,000 $

Total common equity$2,004,000 $

Total liab. and equity$2,700,000 $

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 otherwords, what is the firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places.

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