The Landis Corporation had 2008 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:
Percent-of-sales method (LO3)
Balance Sheet
End of Year
(in $ millions)
Assets Liabilities and Stockholders' Equity
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 10 Accounts payable . . . . . . . . . . . . . $ 15
Accounts receivable. . . . . . . . . . . . 15 Accrued expenses . . . . . . . . . . . . . 5
Inventory . . . . . . . . . . . . . . . . . . . . 50 Other payables . . . . . . . . . . . . . . . 40
Plant and equipment . . . . . . . . . . . 75 Common stock . . . . . . . . . . . . . . . . 30
Retained earnings . . . . . . . . . . . . . 60
Total assets . . . . . . . . . . . . . . . . . . $150
Total liabilities and
stockholders' equity . . . . . . . . . . $150
Landis Corporation (External funds requirement)
The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 2008 was $33 million. Common stock and the company's long-term bonds are constant at $10 million and $5 million, respectively. Notes payable are currently $12 million.
a. How much additional external capital will be required for next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.)
b. What will happen to external fund requirements if Landis Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these separately.
c. Prepare a pro forma balance sheet for 2009 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part b in answering this question (that is, use the original information and part a in constructing your pro forma balance sheet).
Percent
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5%
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 15
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Net fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . 40
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 15
Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Profit margin after taxes . . . . . . . . . . . . . . . . . . 6%
(LO4) 3 This included fixed assets as the firm is at full capacity.
Block-Hirt-Danielsen:
Foundations of Financial Management, 13th Edition
II. Financial Analysis and Planning
4. Financial Forecasting © The McGraw-Hill Companies, 2009
Chapter 4 Financial Forecasting 119
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