Morrissey Technologies Inc.s 2018 financial statements are shown here. Suppose that in 2019, sales increase by 10%
Question:
Suppose that in 2019, sales increase by 10% over 2018 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2018 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs/sales ratio to 87.5% and increase its total liabilities-to assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2019 forecasted interest-bearing debt as notes payable, and it will issue long-term bonds for the remainder.
The firm forecasts that its before tax cost of debt (which includes both short- and long-term debt) is 12.5%. Assume that any common stock issuance or repurchases can be made at the firms current stock price of $45.
a. Construct the forecasted financial statements assuming that these changes are made.What are the firms forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings?
b. If the profit margin remains at 5% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero?In other words, what is the firms sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.)
Financial StatementsFinancial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...
Step by Step Answer:
Fundamentals of Financial Management
ISBN: 978-1337395250
15th edition
Authors: Eugene F. Brigham, Joel F. Houston