Problem 4-33

Clydes Well Servicing has the following financial statements. The balance sheet items, profit margin, and dividend payout have maintained the same relationships the past couple of years; these relationships are anticipated to hold in the future. Clydes has excess capacity, so there is no expected increase in capital assets.

Income Statement
Sales	$2,000,000
Cost of goods sold	1,260,000
Gross profit	740,000
Selling and administrative expense	400,000
Amortization	55,000
Earnings before interest and taxes	285,000
Interest	50,000
Earnings before taxes	235,000
Taxes	61,000
Earnings available to common shareholders	$174,000
Dividends paid	$104,000

Balance Sheet
Assets		Liabilities and Shareholders' Equity
Cash	$30,000	Accounts payable	$105,000
Accounts receivable	260,000	Accruals	20,000
Inventory	210,000	Bank loan	150,000
Current assets	500,000	Current liabilities	275,000
Capital assets	550,000	Long-term debt	200,000
		Common stock	175,000
		Retained earnings	400,000
Total assets	$1,050,000	Total liabilities and equity	$1,050,000

a. Using a percent-of-sales method, determine whether Clydes can handle a 30 percent sales increase without using external financing. If so, what is the need?

The firm (Click to select) needs has $ in (Click to select) external funds surplus funds .

b. If the average collection period of receivables could be held to 43 days, what would the need be for external financing? All other relationships remain the same.

New funds required

$

Suppose the following results with the increased sales of $600,000. The first $75,000 of any new funds would be short-term debt and then long-term debt.

Income Statement
Cash increases by		$5,000
Average collection period		43	days
Inventory turnover (COGS)		6	X
Capital assets increase by		$125,000
Accounts payable increase	in proportion to sales
Accruals	No change
Long-term debt decreases by		$25,000
Gross profit margin		40	%
Selling, general, and administrative expense increase by		$50,000
Amortization increases by		$12,500
Interest decreases by		$10,000
Tax rate		35	%
Dividends increase to		$120,000

c-1. What new funds would be required? (Enter your answers in thousands, rounded to 2 decimal places.)

New funds required

$

c-2. Prepare the pro forma balance sheet. (Input all answers in thousands. Be sure to list the assets and liabilities in order of their liquidity. Round the final answer to 1 decimal place. )

Balance Sheet ($ thousands)
Assets		Liabilities and Equity
(Click to select) Accounts receivable Capital asset Prepaid expenses Inventory Cash	$	(Click to select) Capital assets Retained earnings Common stock Cash Accounts payable Accounts receivable	$
(Click to select) Accounts receivable Capital asset Inventory Prepaid expenses Cash		(Click to select) Accruals Retained earnings Accounts payable Common stock Accounts receivable
(Click to select) Gross plant Accounts receivable Prepaid expenses Cash Inventory		(Click to select) Bank loan Retained earnings Accounts payable Common stock Accounts receivable
Current assets		Current liabilities
(Click to select) Inventory Current assets Capital assets Accounts receivable Cash
		(Click to select) Long-term debt Accruals Accounts payable Capital assets Bank loan
		(Click to select) Common stock Accruals Accounts payable Capital assets Bank loan
		(Click to select) Retained earnings Accruals Accounts payable Capital assets Bank loan
Total assets	$	Total liabilities and shareholders' equity	$