Managerial Finance

fran {h (n4hrn tk t Part 5 Corporate Valuation and Governance

Assume Upton's profit margin and dividend payout ratio will be the same in 2014 as theywere in 2013. What is the amount of the line of credit reported on the 2014 forecasted balance sheets? (Hint: You don't need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2014 addition to retained earnings for the balance sheet.)

Stevens Textiles's 2013 financial statements are shown here:

Balance Sheet as of December 3L,2At3 (Thousands of DoIIars)

Cash

Receivables

Inventories

Total current assets

Net fixed assets

Total assets

b.

$ 1,080 6,480

9,000

$16,s60

12,600

Sales

Operating costs

Earnings before interest and ta-xes

Interest

Pre-tax earnings

Taxes (40%)

Net income

Dividends (457o)

Addition to retained earnirrgs

(12-8)

Financing Deficit

Accounts payable

Accruals

Line of credit

Notes payable

Total current liabilities

Mortgage bonds

Common stock

Retained earnings

Total liabilities and equity

$ 4,320 2,880

0

2,100

$ 9,300 3,500

3,500

L2,860

$ 29,160$29,160

Income Statement for Decemb er 31, 2073 (Thousands of Dollars)

$36,000

32,440

$ 3,s60 460

$ 3,100 1,240

$ 1,860 $ 837 $ 1,023

Suppose 2014 sales are projected to increase by 15o/o over 2013 sales. Use the forecasted tinancial statement method to tbrecast a balance sheet and incorne statement for December 31,2014. The interest rate on all debt is i0%, and cash earns no interest income. Assume that all additional debt in the fonl of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2013, that it cannot sell off any of its fixed assets, and that any required financing lvill be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as saies. Determine the additional funds needed. What is the resulting total forecasted amount of the line of credit?