ADDITIONAL FUNDS NEEDED Morrissey Technologies Inc.s 2015 financial statements are shown here.

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2015

Cash $ 180,000 Accounts payable $ 360,000

Receivable 360,000 Accrued liabilities 180,000

Inventories 720,000 Notes payable 56,000

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

Long term debt 100,000

Fixed assets 1,440,000 Common stock 1,800,000

000 Retained earnings 204,000

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

Morrissey Technologies Inc.: Income Statement for December 31, 2015

Sales $3,600,000

Operating cost including depreciation 3,279,000

EBIT $ 320,280

Interest 20,280

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 $ 1.08

Suppose that in 2016, sales increase by 10% over 2015 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2015 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 2016 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-term and long-term debt) is 12.5%. Assume that any common stock issuances or repurchases can be made at the firms current stock price of $45.

Construct the forecasted financial statements assuming that these changes are made. What is the firms forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings?

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 other words, what is the firms sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.)

Krogh Lumber's 2012 financial statements are shown here.

Krogh Lumber: Balance Sheet as of December 31, 2015 (Thousands of Dollars)

Cash $1,800 Accounts payable $7,200

Receivables 10,800 Notes payable 3,472

Inventories 12,600 Accrued liabilities 2,520

Total current assets $25,200 Total current liabilities $13,192

Mortgage bonds 5,000

Net fixed assets 21,600 Common stock 2,000

Retained earnings 26,608

Total assets $46,800 Total liabilities and equity $46,800

Krogh Lumber: Income Statement for December 31, 2012 (Thousands of Dollars)

Sales $36,000

Operating costs including depreciation 30,783

Earnings before interest and taxes $5,217

Interest 1,017

Earnings before taxes $4,200

Taxes (40%) 1,680

Net income $2,520

Dividends (60%) $1,512

Addition to retained earnings $1,008

Assume that the company was operating at full capacity in 2015 with regard to all items except fixed assets; fixed assets in 2015 were being utilized to only 80% of capacity. By what percentage could 2016 sales increase over 2015 sales without the need for an increase in fixed assets?

Now suppose 2016 sales increase by 25% over 2015 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 debt-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 2016 total debt as notes payable, and it will issue bonds for the remainder. Its before-tax cost of debt is 10.5%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings?

17-15: FORECASTING FINANCIAL STATEMENTS Use a spreadsheet model to forecast the financial statements in Problems 17-13 and 17-14