Chapter:

12

Problem:

10

Start with the partial model in the file Ch12 P10 Build a Model.xls on the textbooks Web site, which contains the 2013 financial statements of Zieber Corporation. Forecast Zeiber's 2014 income statement and balance sheets. Use the following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, and inventories to sales will be the same in 2014 as in 2013. (3) Zeiber will not issue any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt and the interest expense on long-term debt is based on the average balance during the year . (5) No interest is earned on cash. (6) Dividends grow at an 8% rate. (6) Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by drawing on a line of credit with an interest rate of 12%. Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit. If surplus funds are available, pay a special dividend.

a. What are the forecasted levels of notes payable and special dividends?

Key Input Data:

Used in the

forecast

Tax rate

40%

Dividend growth rate

8%

Rate on notes payable-term debt, rstd

9%

Rate on long-term debt, rd

11%

Rate on line of credit, rLOC

12%

December 31 Income Statements:

(in thousands of dollars)

Forecasting

2013

2014

2014

2013

basis

Ratios

Inputs

Forecast

Sales

$455,150

Growth

6.00%

$482,459

Expenses (excluding depr. & amort.)

$386,878

% of sales

85.000%

85.00%

Depreciation and Amortization

$14,565

% of fixed assets

8.000%

8.00%

EBIT

$53,708

Interest expense on long-term debt

$11,880

Interest rate x average debt during year

Interest expense on line of credit

$0

EBT

$41,828

Taxes (40%)

$16,731

Net Income

$25,097

Common dividends (regular dividends)

$12,554

Growth

8.00%

Special dividends

$0

Addition to retained earnings (DRE)

$12,543

December 31 Balance Sheets

(in thousands of dollars)

Forecasting

2013

2014

2014

2013

basis

Ratios

Inputs

Without adj.

Adj.

Assets:

Cash

$18,206

% of sales

Accounts Receivable

$100,133

% of sales

Inventories

$45,515

% of sales

Total current assets

$163,854

Fixed assets

$182,060

% of sales

Total assets

$345,914

Liabilities and equity

Accounts payable

$31,861

% of sales

Accruals

$27,309

% of sales

Line of credit

$0

Previous

Total current liabilities

$59,170

Long-term debt

$120,000

Previous

Total liabilities

$179,170

Common stock

$60,000

Previous

Retained Earnings

$106,745

Previous + DRE

Total common equity

$166,745

Total liabilities and equity

$345,914

Increase in spontaneous liabilities (accounts payable and accruals)

+ Increase in long-term bonds, preferred stock and common stock

+ Net income minus regular common dividends

Increase in financing

Increase in total assets

Amount of deficit or surplus financing:

If deficit in financing (negative), draw on line of credit

If surplus in financing (positive), pay special dividend

a. What are the forecasted levels of the line of credit and special dividends?

Required line of credit

Note: we copied values from G78:G79 when sales growth in G32 = 6%.

Special dividends

b. Now assume that the growth in sales is only 3%. What are the forecasted levels of line of credit and special dividends?

Required line of credit

Note: we copied values from G78:G79 when sales growth in G32 = 3%.

Special dividends