Projected Results to Meet Corporate Objectives Tablon Inc. is a wholly owned subsidiary of Marbel Co. The philosophy of Marbel's management is to allow the subsidiaries to operate as independent units. Corporate control is exercised through the establishment of minimum objectives for each subsidiary, accompanied by substantial rewards for success and penalties for failure. The time period for performance review is long enough for competent managers to display their abilities. Each quarter, the subsidiary is required to submit financial statements. The statements are accompanied by a letter from the subsidiary president explaining the results to date, a forecast for the remainder of the year, and the actions to be taken to achieve the objectives if the forecast indicates that the objectives will not be met. Marbel management, in conjunction with Tablon management, had set the objectives listed below for the year ending May 31, 2017. These objectives are similar to those set in previous years. Sales growth of 20% Return on stockholders' equity of 15% A long-term debt-to-equity ratio of not more than 1.0 Payment of a cash dividend of 50% of net income, with a minimum payment of at least $400,000 Tablon's controller has just completed the financial statements for the six months ended November 30, 2016, and the forecast for the year ending May 31, 2017. The statements follow. After a cursory glance at the financial statements, Tablon's president concluded that not all objectives would be met. At a staff meeting of the Tablon management, the president asked the controller to review the projected results and recommend possible actions that could be taken during the remainder of the year so that Tablon would be more likely to meet the objectives. Tablon Inc. Income Statement (thousands omitted) Six Months Forecast for Year Ended Ended Year Ending May 31, November 30, May 31, 2016 2016 2017 Sales $25,050 $15,030 $30,060 Cost of goods sold $13,030 $8,000 $16,000 Selling expenses 5,060 3,520 7,040 Administrative expenses and interest 3,990 2,530 5,060 Income taxes (40%) 1,188 392 784 Total expenses and taxes $23,268 $14,442 $28,884 Net income $1,782 $588 $1,176 Dividends declared and paid 891 0 588 Income retained $891 $588 $588 Forecast for May 31, 2017 $520 7,048 8,620 7,320 Tablon Inc. Statement of Financial Position (thousands omitted) May 31, November 30, 2016 2016 Assets Cash $420 $520 Accounts receivable (net) 4,030 6,458 Inventory 7,020 8,520 Plant and equipment (net) 6,500 7,000 Total assets $17,970 $22,498 Liabilities and Equities Accounts payable $2,970 $4,000 Accrued taxes 290 210 Long-term borrowing 6,010 9,000 Common stock 5,010 5,010 Retained earnings 3,690 4,278 Total liabilities and equities $17,970 $22,498 Required: $23,508 $4,000 210 10,010 5,010 4,278 $23,508 1. Calculate the projected results for each of the four objectives established for Tablon Inc. State which results will not meet the objectives by year-end. For return on stockholders' equity ratio, round raw calculations to three decimal places; then, enter answer as a percentage rounded to one decimal place. For example, .1782 rounds to .178 and would be entered as 17.8, indicating 17.8%. For long-term debt-to-equity ratio & Cash dividend payment, round to two decimal places. Meets Objective by Requirement Projected Result Year-End? Sales growth 20 % Yes Return on stockholders' equity 13.5 X % No Long-term debt-to-equity ratio 1.08 to 1 No Cash dividend payment $ 606 X Yes
