Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to

Question:

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars):

Cash .............................. $ 3.5 ...... Accounts payable ........................$ 9.0

Receivables ...................... 26.0 ....... Notes payable ............................ 18.0

Inventories ....................... 58.0 ....... Line of credit ................................. 0

Total current assets ............. $ 87.5 .... Accruals ....................................... 8.5

Net fixed assets ................... 35.0 .... Total current liabilities.................... $ 35.5

.................................................... Mortgage loan ............................ 6.0

.................................................... Common stock .......................... 15.0

.................................................... Retained earnings ...................... 66.0

Total assets ...................... $122.5 .... Total liabilities and equity ........... $122.5

Sales for 2016 were $350 million and net income for the year was $10.5 million, so the firm's profit margin was 3.0%. Upton paid dividends of $4.2 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017.

a. If sales are projected to increase by $70 million, or 20%, during 2017, use the AFN equation to determine Upton's projected external capital requirements.

b. Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ non-spontaneous external funds?

c. Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...