4. The managers of White Foods Corporation, fine purveyors of prepackaged blancmange, are

busy planning for the upcoming year, 2019. The marketing team is anticipating a 15% increase

in sales for next year. Use their highly simplified financial statements (which appear below) to

answer the following:

a. If all assets vary in direct proportion to sales, by what amount must they be increased to support the 2019 sales forecast?

b) What is the current (2018) D/E ratio?

c) If the current D/E and payout ratios are to remain constant, how will the expansion of current

assets be financed in regard to debt

that is, how much new debt will need to be issued?

(Assume that maintaining the D/E ratio is a high priority for the firm, and that new debt will be issued to finance an expansion before retained earnings are used.)

d) How much net income can the firm be expected to earn in 2019?

(Lets assume here that if the amount of debt is expected to change for 2019, then the amount of interest paid will also change.)

e) So how will the assets that need to be purchased for this projected sales increase be financed?

In other words, what will the total financing package look like?

5) How much PPE would need to be purchased if it turned out that only 90% the current (2018)

amount of PPE is actually being used?

2017 2018 2019

Revenues 35000 40000

- Cost of Goods Sold (21000) (24000)

Gross Profit 14000 16000

- Operating Expenses(10500) (12000)

EBIT 3500 4000

- Interest (175)(200)

EBT 3325 3800

- Taxes

(998) (1140)

E (i.e., earnings, net income, profit)2327 2660

Dividends 698 798

all numbers are in thousands of dollars

interest on total debt is 5% per year

cogs60% of sales

total corporate taxes are 30

Oe 30% of sales

the payout ratio is .30

Actual Forecasted

STATEMENT OF FINANCIAL POSITION

2017 2018 2019

Assets

Current 5000 6000

Non-current9500 9000

Total Assets14500 15000

Liabilities

Current(only A/P)1000 1000

Non-current(only PPE)2500 2000

Total Liabilities3500 3000

Equity (total)11000 12000

1

Current assets for 2018 include: cash=400, A/R=1600, and inventory =3000