16-14      EXCESS CAPACITY Krogh Lumber’s 2008 financial statements are shown here.

 

Krogh Lumber: Balance Sheet as of December 31, 2008 (Thousands of  Dollars)

 

Cash	$  1,800	Accounts payable	$  7,200
Receivables	10,800	Notes payable	3,472
Inventories	  12,600	Accrued liabilities	     2,520
Total current assets	$25,200	Total current liabilities	$13,192
Â	Â	Mortgage bonds	5,000
Net fixed assets	21,600	Common stock	2,000
Â	Â	Retained earnings	  26,608
Total assets	$46,800	Total liabilities and equity	$46,800

 

Krogh Lumber: Income Statement for December 31, 2008 (Thousands of Dollars)

 

Sales	$36,000
Operating costs including depreciation	  30,783
Earnings before interest and taxes	$  5,217
Interest	    1,017
Earnings before taxes	$  4,200
Taxes (40%)	    1,680
Net income	$  2,520
Dividends (60%)	$  1,512
Addition to retained earnings	$  1,008

 

a.        Assume that the company was operating at full capacity in 2008 with regard to all items except fixed assets; fixed assets in 2008 were being utilized to only 75% of capacity. By what percentage could 2009 sales increase over 2008 sales without the need for an increase in fixed assets?

b.       Now suppose 2009 sales increase by 25% over 2008 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its Operating costs/Sales ratio to 82% and increase its debt ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2009 total debt as notes payable, and it will issue bonds for the remainder. Its before-tax cost of debt is 11%. Any stock issuances or repurchases will be made at the firm’s current stock price of $40. Develop the projected financial statements as shown in Table 16-2. What are the balances of notes payable, bonds, common stock, and retained earnings?

 

 

 

 

 

 

 

 

16-15      FORECASTING FINANCIAL STATEMENTS Use a spreadsheet model to forecast the financial statements in Problems 16-13 and 16-14.

 

 

 

 

INTEGRATED CASE