Problem 4. Table 3.1 below presents R&E Supplies financial statements for the period 2008 through 2011, and Table 3.5 presents a pro forma financial forecast for 2012. Use the information in these tables to answer the following questions.

Table 3.1 Financial Statements for R&E Supplies, Inc., December 31, 2008-2011 ($ thousands)

Income Statements

2008 2009 2010 2011

Net sales $11,190 $13,764 $16,104 $20,613

Cost of goods sold 9,400 11,699 13,688 17,727

Gross profit 1,790 2,065 2,416 2,886

Expenses:

General, selling, and administrative expenses 1,019 1,239 1,610 2,267

Net interest expense 100 103 110 90

Earnings before tax 671 723 696 529

Tax 302 325 313 238

Earnings after tax $ 369 $ 398 $ 383 $ 291

Balance Sheets

Assets

Current assets:

Cash and securities $ 671 $ 551 $ 644 $ 412

Accounts receivable 1,343 1,789 2,094 2,886

Inventories 1,119 1,376 1,932 2,267

Prepaid expenses 14 12 15 18

Total current assets 3,147 3,728 4,685 5,583

Net fixed assets 128 124 295 287

Total assets $ 3,275 $ 3,852 $ 4,980 $ 5,870

Liabilities and Owners Equity

Current liabilities:

Bank loan $ 50 $ 50 $ 50 $ 50

Accounts payable 1,007 1,443 2,426 3,212

Current portion long-term debt 60 50 50 100

Accrued wages 5 7 10 18

Total current liabilities 1,122 1,550 2,536 3,380

Long-term debt 960 910 860 760

Common stock 150 150 150 150

Retained earnings 1,043 1,242 1,434 1,580

Total liabilities and owners equity $ 3,275 $ 3,852 $ 4,980 $ 5,870

Table 3.5 Pro Forma Financial Forecast for R&E Supplies, Inc., December 31, 2012 ($ thousands)

Year 2011 Actual 2012

Net sales $20,613

Growth rate in sales 25.0%

Cost of goods sold/net sales 86.0%

General, sell., and admin., expenses/net sales 12.0%

Long-term debt $ 760 $660

Current portion long-term debt $ 100 $100

Interest rate 10.0%

Tax rate 45.0%

Dividend/earnings after tax 50.0%

Current assets/net sales 29.0%

Net fixed assets $280

Current liabilities/net sales 14.5%

Owners equity $ 1,730

Income Statement

Year Equations (2012) 2012

Net sales = $20,613 + ($20,613 x 25.0%) $25,766

Cost of goods sold = 86.0% x $25,766 22,159

Gross profit = $25,766 - $22,159 3,607

Gen., sell., and admin. exp. = 12.0% x $25,766 3,092

Interest expense = 10.0% x ($660 + $100 + $1548) 231

Earnings before tax = $3,607 - $3,092 -231 285

Tax = 45.0% x $285 128

Earnings after tax = $285 - $128 156

Dividends paid = 50.0% x $156 78

Additions to retained earnings = $156 - $78 78

Balance Sheet

Current assets = 29.0% x $25,766 $ 7,472

Net fixed assets = $280 280

Total fixed assets = $7,472 + $280 $ 7,752

Current liabilities = 14.5% x $25,766 $ 3,736

Long-term debt = $660 660

Equity = $1,730 + $78 $ 1,808

Total liabilities and = $3,736 + $660 + $1,808 $ 6,204

shareholders equity

External Funding Required = $7,752 - $6,204 $ 1,548

a. Calculate R&E Supplies sustainable growth rate in each year from 2009 through 2012.

b. Comparing the companys sustainable growth rate with its actual and projected growth rates in sales over these years, what growth management problems does R&E Supplies appear to face in this period?

c. How did the company cope with these problems? Do you see any difficulties with the way it addressed its growth problems over this period? If so, what are they?

d. What advice would you offer management regarding managing future growth?