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Problem 4-17 The Haverly Company expects to finish the current year with the following financial results, and is developing its annual plan for next year. Haverly Company Income Statement This Year 5000) $761 10 24717 100.0 32.5 67.5 51393 Revenue COGS Gross Margin Expenses: Marketing Engineering Fin & Admin Total Exp. $15360 8142 20.8 10.7 10.9 8333 $32335 42.5 EBIT $19058 1795 Interest EBT $17263 7250 Inc Tax o Net Income $10013 13.2 Haverly Company Balance Sheet This Year ($000) ASSETS LIABILITIES & EQUITY $ 7519 Accounts payable Cash $ 1854 Accounts receivable 12685 Accruals 819 Inventory Current assets 7062 $27266 $ 2673 $41302 Current liabilities Long-term debt Equity Stock accounts Fixed Assets Gross $75277 $12768 Accumulated depreciation (21812) Retained earnings 23988 Net $53465 Total Equity $36756 Total assets $80731 Total L&E $80731 The following facts are available. Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 45% purchased material. Currently owned assets will depreciate an additional $1299000 next year. There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $30 million is expected to grow by 12% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been recelved. This materials accrual is generally about 10% of the payables balance at year end. The combined state and federal income tax rate is 42%. Interest on current and future borrowing will be at a rate of 15%. PLANNING ASSUMPTIONS Income Statement Items 1. Revenue will grow by 12% with no change in product mix. Competitive pressure, however, is expected to force some reductions in pricing. 2. The pressure on prices will result in a 2% deterioration (increase) in the next year's cost ratio. Spending in the marketing department is considered excessive and will be held to 19% of revenue next year. 4. Because of a major development project, expenses in the engineering department will increase by 25%. 5. Finance and administration expenses will increase by 6%. Assets and Liabilities 6. An enhanced cash management system will reduce cash balances by 10%. 7. The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.) 8. The Inventory turnover ratio (COGS/Inventory) will decrease by 0.5x. 9. Capital spending is expected to be $6 million. The average depreciation life of the assets to be acquired is five years. The firm uses straight-line depreciation, and takes a half year in the first year. 10. Bills are currently paid in 60 days. Plans are to shorten that to 40 days. 11. A dividend totaling $1.5 million will be paid next year. No new stock will be sold. Develop next year's financial plan for Haverly on the basis of these assumptions and last year's financial statements. Include a projected income statement, balance sheet and a statement of cash flows. Enter your dollar answers in thousands. For example, an answer of $200 thousands should be entered as 200, not 200000. Round dollar answers and Intermediate calculations to the nearest thousand. Round the percentage values to 1 decimal place. Enter all amounts In Income Statement as a positive numbers. Use a minus sign, to indicate a negative cash outflow, or a decrease in cash in Balance Sheet and Cash Flow Statement. HAVERLY COMPANY INCOME STATEMENTS ($000) THIS YEAR NEXT YEAR $. Revenue $76110 100.0 100.0 COGS 24717 32.5 Gross Margin $51393 67.5 Expenses: Marketing 20.8 $15860 8142 Engineering 10.7. 10.9 Fin & Admin 8333 Total Exp. $32335 42.5 " EBIT $19058 25 " Interest 1795 2.4 EBT $17263 22.7 $ Inc Tax 7250 9.5 Net Income $10013 13.2 HAVERLY COMPANY BALANCE SHEETS ($000) LIABILITIES & EQUNTY ASSETS THIS YR NEXT YR THIS YR NEXT YR Cash Accts. Pay. $ 1854 $ 7519 12685 Accts. Rec. Accruals 819 Inventory 7062 Curr. Assets $27266 Curr. Liab. $ 2673 Long Term Debt $41302 A Fixed Assets Equity Stock Accts Gross $ $12768 $75277 (21812) Accum. Depr. Retained Earn 23988 Net $53465 Total Equity $36756 A Total Assets $80731 Total L & E $80731 $ HAVERLY COMPANY CHANGES IN WORKING CAPITAL NEXT YEAR ($000) A/R " Inventory " A/P " Accruals | " HAVERLY COMPANY STATEMENT OF CASH FLOWS NEXT YEAR ($000) OPERATING ACTIVITIES Net Income $ Depreciation Increase in W/C Cash Flow From Operating Activities INVESTING ACTIVITIES Increase in Gross Fixed Assets INVESTING ACTIVITIES 4 Increase in Gross Fixed Assets FINANCING ACTIVITIES Decrease in Debt A Dividend " | " NET CASH FLOW " RECONCILIATION " Beginning Cash Net Cash Flow " | Ending Cash " Problem 4-17 The Haverly Company expects to finish the current year with the following financial results, and is developing its annual plan for next year. Haverly Company Income Statement This Year 5000) $761 10 24717 100.0 32.5 67.5 51393 Revenue COGS Gross Margin Expenses: Marketing Engineering Fin & Admin Total Exp. $15360 8142 20.8 10.7 10.9 8333 $32335 42.5 EBIT $19058 1795 Interest EBT $17263 7250 Inc Tax o Net Income $10013 13.2 Haverly Company Balance Sheet This Year ($000) ASSETS LIABILITIES & EQUITY $ 7519 Accounts payable Cash $ 1854 Accounts receivable 12685 Accruals 819 Inventory Current assets 7062 $27266 $ 2673 $41302 Current liabilities Long-term debt Equity Stock accounts Fixed Assets Gross $75277 $12768 Accumulated depreciation (21812) Retained earnings 23988 Net $53465 Total Equity $36756 Total assets $80731 Total L&E $80731 The following facts are available. Payables are almost entirely due to inventory purchases and can be estimated through COGS, which is approximately 45% purchased material. Currently owned assets will depreciate an additional $1299000 next year. There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $30 million is expected to grow by 12% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been recelved. This materials accrual is generally about 10% of the payables balance at year end. The combined state and federal income tax rate is 42%. Interest on current and future borrowing will be at a rate of 15%. PLANNING ASSUMPTIONS Income Statement Items 1. Revenue will grow by 12% with no change in product mix. Competitive pressure, however, is expected to force some reductions in pricing. 2. The pressure on prices will result in a 2% deterioration (increase) in the next year's cost ratio. Spending in the marketing department is considered excessive and will be held to 19% of revenue next year. 4. Because of a major development project, expenses in the engineering department will increase by 25%. 5. Finance and administration expenses will increase by 6%. Assets and Liabilities 6. An enhanced cash management system will reduce cash balances by 10%. 7. The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.) 8. The Inventory turnover ratio (COGS/Inventory) will decrease by 0.5x. 9. Capital spending is expected to be $6 million. The average depreciation life of the assets to be acquired is five years. The firm uses straight-line depreciation, and takes a half year in the first year. 10. Bills are currently paid in 60 days. Plans are to shorten that to 40 days. 11. A dividend totaling $1.5 million will be paid next year. No new stock will be sold. Develop next year's financial plan for Haverly on the basis of these assumptions and last year's financial statements. Include a projected income statement, balance sheet and a statement of cash flows. Enter your dollar answers in thousands. For example, an answer of $200 thousands should be entered as 200, not 200000. Round dollar answers and Intermediate calculations to the nearest thousand. Round the percentage values to 1 decimal place. Enter all amounts In Income Statement as a positive numbers. Use a minus sign, to indicate a negative cash outflow, or a decrease in cash in Balance Sheet and Cash Flow Statement. HAVERLY COMPANY INCOME STATEMENTS ($000) THIS YEAR NEXT YEAR $. Revenue $76110 100.0 100.0 COGS 24717 32.5 Gross Margin $51393 67.5 Expenses: Marketing 20.8 $15860 8142 Engineering 10.7. 10.9 Fin & Admin 8333 Total Exp. $32335 42.5 " EBIT $19058 25 " Interest 1795 2.4 EBT $17263 22.7 $ Inc Tax 7250 9.5 Net Income $10013 13.2 HAVERLY COMPANY BALANCE SHEETS ($000) LIABILITIES & EQUNTY ASSETS THIS YR NEXT YR THIS YR NEXT YR Cash Accts. Pay. $ 1854 $ 7519 12685 Accts. Rec. Accruals 819 Inventory 7062 Curr. Assets $27266 Curr. Liab. $ 2673 Long Term Debt $41302 A Fixed Assets Equity Stock Accts Gross $ $12768 $75277 (21812) Accum. Depr. Retained Earn 23988 Net $53465 Total Equity $36756 A Total Assets $80731 Total L & E $80731 $ HAVERLY COMPANY CHANGES IN WORKING CAPITAL NEXT YEAR ($000) A/R " Inventory " A/P " Accruals | " HAVERLY COMPANY STATEMENT OF CASH FLOWS NEXT YEAR ($000) OPERATING ACTIVITIES Net Income $ Depreciation Increase in W/C Cash Flow From Operating Activities INVESTING ACTIVITIES Increase in Gross Fixed Assets INVESTING ACTIVITIES 4 Increase in Gross Fixed Assets FINANCING ACTIVITIES Decrease in Debt A Dividend " | " NET CASH FLOW " RECONCILIATION " Beginning Cash Net Cash Flow " | Ending Cash