Garland Company

Balance Sheet, Year Ended Dec 31, 2019

Assets:
Cash and marketable securities		$ 500,000
Accounts receivable		800,000
Inventories		1,350,000
Prepaid expenses		50,000
Total current assets		$ 2,700,000
Gross Fixed Assets		5,000,000
Accumulated Depreciation		2,000,000
Net fixed assets		$ 3,000,000
Total assets		$ 5,700,000
Liabilities:
Accounts payable		$ 475,000
Notes payable			900,000
Total current liabilities		$ 1,375,000
Long-term debt		1,200,000
Owner's equity		3,125,000
Total liabilities and owner's equity		$ 5,700,000
Garland Company
Income Statement, 2019
Net sales		$ 8,000,000
Cost of Goods Sold		3,500,000
Selling and administrative expense		2,000,000
Depreciation expense		250,000
Interest expense		150,000
Earnings before taxes		$ 2,100,000
Income taxes		700,000
Net income		$ 1,400,000

Question 3

On account of its very recent entry into a lucrative market, Garland Company (whose financials are given above) projects an 18% increase in sales for next year (2020). NOTE: All numbers in the financials are in thousands of dollars. The company paid out $1.26 billion in dividends in 2019, and its payout ratio is constant. Current assets and net fixed assets, and all operating expenses, vary directly with sales. Accounts payables will also maintain their existing relationship to sales; the other liabilities, however, are not spontaneous. Management has decided that any required additional funding will be raised through long-term debt, on which it will pay an interest rate of 8.5%. Any short-term debt will be rolled over at the same interest rate as existed at the end of 2019. Long-term debt will increase by the full amount of any estimated EFN (i.e., no principal pay-down on existing debt is anticipated for next year, 2019). NOTE: This means that none of the existing debt will be paid down in 2020, and will be charged the same interest rate as it was charged in 2019. The tax rate for 2019 will apply for 2020 as well. NOTE: You need to figure the tax rate yourself.

Estimate the external financing needed (EFN) for 2020, based on the projected growth in sales, using the percentage of sales method.