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Question 2. Capital budgeting with percentage of sales method The Minoso Corporation anticipates a 20 percent increase in sales for 2014 over its 2013 level.

Question 2. Capital budgeting with percentage of sales method

The Minoso Corporation anticipates a 20 percent increase in sales for 2014 over its 2013 level. Minoso is currently operating at full capacity and thus expects to increase its investment in both current and fixed assets in order to support the increase in forecasted sales.

Minoso Corporation

Income Statement for December 31, 2013

(Thousands of Dollars)

_________________________________

Sales $15,000

Operating expenses -13,000

EBIT 2,000

Interest 400

EBT 1,600

Taxes (40%) 640

Net income 960

Cash dividends (40%) 384

Added retained earnings $576

Balance Sheet as of December 31, 2013

(Thousands of Dollars)

______________________________________________________________________________

Cash $ 1,000 Accounts payable $ 1,600

Accounts receivable 2,000 Bank Loan 1,800

Inventories 2,200 Accrued liabilities 1,200

Total current assets 5,200 Total current liabilities 4,600

Long-term debt 2,200

Fixed assets, net 6,800 Common stock 2,400

Total assets $12,000 Retained earnings 2,800

Total liabilities & equity $12,000 ______________________________________________________________________________

Estimate the additional funds needed (AFN) for 2013 using the formula or equation method that is based on constant percent of sales relationships.

Current

Net sales

NS0

?

Total assets

TA0

?

Accounts payable

AP0

?

Accrued liabilities

AL0

?

Net Income

NI0

Retention ratio

RR0

?

Next period

Sales growth rate

g

20%

NS1

NS0 * (1+g)

?

Change

NS1 - NS0

NS

?

AFN

Change in TA, or TA

(TA0 / NS0) * NS

?

(AP + AL)

((AP0 + AL0)/ NS0) * NS

?

addition to retained earnings

(NS1 * (NI0 / NS0) * RR0)

?

(TA) - (AP+AL) - (addition to Retained earnings)

?

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