(Financial forecasting discretionary financing needs) The most recent balance sheet for the Armadillo Dog Biscuit Co. Inc. is shown in the following table: . The company is about to embark on an advertising campaign, which is expected to raise sales from the current level of $6 million to $8 million by the end of next year. The firm is currently operating at full capacity and will have to increase its investment in both current and fixed assets to support the projected level of new sales. In fact, the firm estimates that both categories of assets will rise in direct proportion to the projected increase in sales. The firm's net profits were 5 percent of the current year's sales but are expected to rise to 6 percent of next year's sales. To help support its anticipated growth in asset needs next year, the firm has suspended plans to pay cash dividends to its stockholders. In past years, a $1.50-per-share dividend has been paid annually. Armadillo's accounts payable and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds needed to finance next year's operations that are not forthcoming from other sources. a. Fill in the table and project the firm's needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needs. b. Compare Armadillo's current ratio (current assets + current liabilities) and debt ratio (total liabilities - total assets) before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of Armadillo's financial condition? a. Fill in the table and project the firm's needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needs. b. Compare Armadillo's current ratio (current assets + current liabilities) and debt ratio (total liabilities = total assets) before the growth in sales and after. What was the effect of the expanded sales on these two dimensions of Armadillo's financial condition? c. What difference, if any, would have resulted if Armadillo's sales had risen to $7 million in 1 year and $8 million only after 2 years? Discuss only; no calculations are required. a. Fill in the table and project the firm's needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needs. (Round to one decimal place.) Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL PERCENT OF SALES PROJECTED LEVEL Current assets $3.0 % Net fixed assets Total Accounts payable Accrued expense Notes payable Current liabilities Long-term debt 4.0 $7.0 $0.5 0.6 0 $1.1 $3.0 Common stock Retained earnings Common equity Total 0.5 2.4 $2.9 $7.0 (Round to one decimal place.) Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 PERCENT OF SALES 50.0% PROJECTED LEVEL $4.0 Net fixed assets 4.0 [% Total Accounts payable $7.0 $0.5 Accrued expense Notes payable Current liabilities Long-term debt Common stock Retained earnings Common equity Total 0.6 0 $1.1 $3.0 0.5 2.4 $2.9 $7.0 (Round to one decimal place.) Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 Net fixed assets 4.0 PERCENT OF SALES 50.0% 66.7% PROJECTED LEVEL $4.0 5.3 Total EA Accounts payable Accrued expense Notes payable Current liabilities Long-term debt Common stock $7.0 $0.5 0.6 0 $1.1 $3.0 0.5 Retained earnings Common equity Total 2.4 $2.9 $7.0 (Round to one decimal place.) Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 Net fixed assets 4.0 Total $7.0 Accounts payable $0.5 Accrued expense 0.6 PERCENT OF SALES 50.0% 66.7% PROJECTED LEVEL $4.0 5.3 $9.3 % 0 Notes payable Current liabilities Long-term debt Common stock Retained earnings Common equity Total $1.1 $3.0 0.5 2.4 $2.9 $7.0 (Round to one decimal place.) Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 PERCENT OF SALES 50.0% PROJECTED LEVEL $4.0 66.7% 4.0 $7.0 $0.5 5.3 $9.3 $0.7 8.3% 0.6 % Net fixed assets Total Accounts payable Accrued expense Notes payable Current liabilities Long-term debt Common stock Retained earnings Common equity Total 0 $1.1 $3.0 0.5 2.4 $2.9 $7.0 (Round to one decimal place.) $3.0 PERCENT OF SALES 50.0% 66.7% Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets Net fixed assets 4.0 Total $7.0 Accounts payable $0.5 Accrued expense 0.6 Notes payable 0 Current liabilities $1.1 Long-term debt $3.0 Common stock 0.5 Retained earnings 2.4 PROJECTED LEVEL $4.0 5.3 $9.3 $0.7 0.8 8.3% 10.0% $ Common equity Total $2.9 $7.0 (Round to one decimal place.) PERCENT OF SALES 50.0% 66.7% Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 Net fixed assets 4.0 Total $7.0 Accounts payable $0.5 Accrued expense 0.6 Notes payable 0 PROJECTED LEVEL $4.0 5.3 $9.3 $0.7 0.8 8.3% 10.0% Current liabilities Long-term debt Common stock $1.1 $3.0 $3.0 0.5 Retained earnings Common equity Total 2.4 $2.9 $7.0 (Round to one decimal place.) Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 Net fixed assets 4.0 PERCENT OF SALES 50.0% 66.7% PROJECTED LEVEL $4.0 5.3 $7.0 $0.5 0.6 8.3% 10.0% $9.3 $0.7 0.8 0 Total Accounts payable Accrued expense Notes payable Current liabilities Long-term debt Common stock Retained earnings Common equity Total $1.1 $3.0 0.5 $3.0 0.5 2.4 $2.9 $7.0 (Round to one decimal place.) PERCENT OF SALES 50.0% 66.7% Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 Net fixed assets 4.0 Total $7.0 Accounts payable $0.5 Accrued expense 0.6 Notes payable 0 Current liabilities $1.1 Long-term debt $3.0 Common stock 0.5 Retained earnings 2.4 Common equity $2.9 PROJECTED LEVEL $4.0 5.3 $9.3 $0.7 0.8 8.3% 10.0% $3.0 0.5 2.9 Total $7.0 (Round to one decimal place.) PERCENT OF SALES 50.0% 66.7% Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 Net fixed assets 4.0 Total $7.0 Accounts payable $0.5 Accrued expense 0.6 Notes payable 0 Current liabilities $1.1 PROJECTED LEVEL $4.0 5.3 $9.3 $0.7 0.8 8.3% 10.0% $3.0 0.5 Long-term debt Common stock Retained earnings Common equity Total $3.0 0.5 2.9 3.4 2.4 $2.9 $7.0 (Round to one decimal place.) Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets Net fixed assets 4.0 Total $7.0 $3.0 PERCENT OF SALES 50.0% 66.7% PROJECTED LEVEL $4.0 5.3 $9.3 PERCENT OF SALES 50.0% 66.7% Armadillo Dog Biscuit Co. Inc. ($ Millions) PRESENT LEVEL Current assets $3.0 Net fixed assets 4.0 Total $7.0 Accounts payable $0.5 Accrued expense 0.6 Notes payable 0 Current liabilities $1.1 Long-term debt $3.0 Common stock 0.5 Retained earnings 2.4 Common equity $2.9 PROJECTED LEVEL $4.0 5.3 $9.3 $0.7 0.8 1.4 8.3% 10.0% $ $3.0 0.5 2.9 3.4 Total $7.0 $9.3 b. Compare Armadillo's current ratio and debt ratio before the growth in sales and after. What was the effect of the expande Armadillo's financial condition? What is the present current ratio? (Round to two decimal places.) What is the projected current ratio? (Round to two decimal places.) What is the present debt ratio? % (Round to two decimal places.) What is the projected debt ratio? % (Round to two decimal places.) in The growth in the firm's assets (due to the projected increase in sales) was financed predominately with notes payable (a current liability) which lead to a the firm's liquidity and a in the firm's use of financial leverage. (Select from the drop-down menus.) c. What difference, if any, would have resulted if Armadillo's sales had risen to $7 million in 1 year and $8 million only after 2 years? If sales had grown slower, then Armadillo would have been able to finance a portion of the funds needed using retained earnings rather than notes payable. c. What difference, if any, would have resulted if Armadillo's sales had risen to $7 million in 1 year and $8 million only after 2 years? If sales had grown slower, then Armadillo would have been able to finance a portion of the funds needed using retained earnings rather than notes payable. This would have resulted in less of a(n) in the current ratio and less of a(n) in the debt ratio. (Select from the drop-down menus.)