EXCESS CAPACITY

a. Assume that the company was operating at full capacity in 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 75% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.

b. Now suppose 2017 sales increase by 30% over 2016 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 total liabilities-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 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 12%. 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? Round your answers to the nearest hundredth of thousand of dollars.

Krogh Lumber's 2016 financial statements are shown here. Krogh Lumber: Balance Sheet as of December 31, 2016 (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 $46,800 equity Krogh Lumber: Income Statement for December 31, 2016 (Thousands of Dollars) Sales $36,000 Operating costs including depreciation 30,783 Earnings before interest and taxes $5,217 Interest 1,017 $4,200 1,680 Earnings before taxes Taxes (40%) Net income Dividends (60%) Addition to retained earnings $2,520 $1,512 $1,008 Krogh Lumber Pro Forma Income Statement December 31, 2017 (Thousands of Dollars) 2016 2017 Sales $ $36,000 Operating costs (includes depreciation) 30,783 EBIT $5,217 Interest expense 1,017 EBT $4,200 Taxes (40%) 1,680 Net Income $2,520 Dividends $1,512 $ Addition to RE $1,008 Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars) 2016 2017 Assets Cash $1,800 Accounts receivable Inventories 10,800 12,600 21,600 Fixed assets Total assets $46,800 Liabilities and Equity Payables + accruals $9,720 Short-term bank loans 3,472 Total current liabilities $13,192 5,000 Long-term bonds Total liabilities $18,192 Common stock Retained earnings Total common equity 2,000 26,608 $28,608 Total liab. and equity $46,800