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

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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.image text in transcribed

Sales for 2018 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 2019.

a. If sales are projected to increase by $70 million, or 20%, during 2019, 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 nonspontaneous external funds?

c. Use the forecasted financial statement method to forecast Upton’s balance sheet for December 31, 2019. 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 2019 as they were in 2018. What is the amount of the line of credit reported on the 2019 forecasted balance sheets?

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Intermediate Financial Management

ISBN: 9781337395083

13th Edition

Authors: Eugene F. Brigham, Phillip R. Daves

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