5 Start with the partial model in the file Ch09 P10 Build a Model.xlsx on the textbook's Web site, which contains the 2018 financial statements of Zeiber Corporation. Forecast Zeiber's 2019 income statement and balance sheets Use the following assumptions: 7 (1) Sales grow by 6 % (2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, 10 and inventories to sales will be the same in 2019 as in 2018. 11 (3) Zeiber will not issue any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt and the interest expense on long-term debt is based on the average balance during the year. 12 13 14 (5) No interest is earned on cash. 15 (6) Regular dividends grow at an 8% rate 16 17 18 Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by drawing on a 19 line of credit with an interest rate of 12%. If surplus funds are available, pay a special dividend. 20 21 22 Key Input Data: Used in the forecast 23 24 Tax rate 25 Dividend growth rate 26 Rate on notes payable-term debt, r 40% 8% 9% 27 Rate on long-term debt, r 28 Rate on line of credit, rLoc 11% 12% 29 30 a. What are the forecasted levels of the line of credit and special dividends? (Hints: Create a column showing the 31 ratios for the current year; then create a new column showing the ratios used in the forecast. Also, create a 32 preliminary forecast that doesn't include any new line of credit or special dividends. Identify the financing deficit 33 or surplus in this preliminary forecast and then add a new column that shows the final forecast that includes any 34 new line of credit or special dividend.) 35 36 Begin by calculating the appropriate historical ratios in Column E. Then put these ratios and any other input ratios 37 in Column G. 38 39 Forecast the preliminary balance sheets and income statements in Column H. Don't include any line of credit or 40 special dividend in the preliminary forecast 41 42 After completing the preliminary forecast of the balance sheets and income statement, go to the area below the 43 preliminary forecast and identify the financing deficit or surplus. Then use Excel's IF statements to specify the |44 amount of any new line of credit OR special dividend (you should not have a new line of credit AND a special 45 dividend, only one or the other). 46 47 After specifying the amounts of the special dividend or line of credit, include the final forecast in column H next to 48 the column for the preliminary forecast (G). In this final forecast, be sure to include the effect of the special 49 dividend or line of credit. 50 Income Statements (December 31, in thousands of dollars) 2019 Input Ratios (use 2019 Preliminary forecast (doesn't include special dividend or LOC) 2019 Final forecast (includes special dividend or LOC) 2018 2018 Forecasting basis ratios) $455,150 $386,878 $14,565 $53,708 Sales Growth Sales 6.0% % of sales Expenses (excluding depr. & amort.) Depreciation and Amortization % of fixed assets EBIT $11,880 $0 Interest expense on long-term debt Interest rate Interest expense on line of credit Interest rate $41,828 $16,731 $25,097 T s (40%) Tax rate Net Income Common dividends (regular dividends) Special dividends Addition to retained earnings $12,554 Growth Zero in preliminary forecast $12,543 2019 Preliminary Balance Sheets (December 31, in thousands of dollars) forecast (doesn't include special 2019 Final forecast 2019 Input (includes special dividend or LOC) 2018 dividend or LOC) Forecasting basis ratios Assets: Cash $18,206 % of sales $100,133 $45,515 $163,854 $182,060 $345,914 % of sales Accounts Receivable Inventories % of sales Total current assets Fixed assets % of sales Total assets Liabilities and equity Accounts payable $31,861 $27,309 % of sales Accruals % of sales Line of credit $0 Zero in preliminary forecast $59,170 Total current liabilities $120,000 Same as previous $179,170 Long-term debt Total liabilities $60,000 $106,745 $166,745 $345,914 Common stock Retained Earnings Total common equity Same as previous PreviousAddition to RE Total liabilities and equity $0 $0 Balance Sheet Check Total Assets Total Liabilities & Equity Identify Financing Deficit or Surplus Increase in spontaneous liabilities (accounts payable and accruals) + Increase in long-term bonds, preferred stock and common stock +Net income (in preliminary forecast) minus regular common dividends Increase in financing - Increase in total assets Amount of financing deficit or surplus: Use if state ment. Use if) statement If deficit in financing (negative), show the amount for the line of credit If surplus in financing (positive), show the amount of the special dividend a. What are the forecasted levels of the line of credit and special dividends with a 6% growth in sales? Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit (assume a value of zero for G:H60). Note: copyand paste exact values from H104:H105 when sales growth in F55 6% . Required line of credit Special dividends Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance s heet balances (H92-0). b. Now assume that the growth in sales is only 3 % (do this by changing the growth rate in Cell F58). What are the forecasted levels of line of credit and special dividends? Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit (assume a value of zero for G:H60) Required line of credit Special dividends Note: copy and paste exact values from H104:H105 when sales growth in F55 3 %. Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). c. Now assume that the growth in sales is 6% (do this by changing the growth rate in Cell F58). What are the forecasted levels of line of credit and special dividends? Assume that any draw on the line of credit will be made throughout the year, so there will be additional interest expense for the new line of credit. The interest expense will be calculated based on the average line of credit during the year. Required line of credit Special dividends Note: copy and paste exact value from H84 $0 after using the Goal Seek function when sales growth in F55 = 6 % Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). If H92 # 0, then use Goal Seek to get it to balance Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). If H92 #0, then use Goal Seek to get it to balance How to use the goal seek function to find the exact amount: 1) Type your initial estimate for the line of credit from G104 into cell H84 You'll notice that the balance sheet does not balance due to the financing feedback (see check in H92). 2) Go to Data What-If Analysis Goal Seek... 3) You want to find the exact amount for the line of credit that makes the balance sheet balance (i.e., total assets total liabilities total equity) This is your "goar cell. H92 is the cell that checks whether or not the balance sheet balances The balance sheet is balanced when the check (H92) is equal to zero (0) We want to change the amount of the line of credit (H84) until the balance sheet balances. Set cell: To Value By changing cell: Goal Seek Status Goal Seek ? X ? X Goal Seeking with Cell H92 SH$92 Set cell Step found a solution To yalue 0 Pause Target value C SHS84 By changing cell Current value: $0 Cancel OK OK Cancel d. Now assume that the growth in sales is only 3% ( do this by changing the growth rate in Cell F58). What are the forecasted levels of line of credit and special dividends? Assume that any draw on the line of credit will be made throughout the year, so there will be additional interest expense for the new line of credit. The interest expense will be calculated based on the average line of credit during the year. Required line of credit Note: copy and paste exact values from H66 after using the goal seek (if required) when sales growth in F55 3% Special dividends Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). If H92 #0, then use Goal Seek to get it to balance Why does the financing feedback impact the line of credit but not the special dividends? 5 Start with the partial model in the file Ch09 P10 Build a Model.xlsx on the textbook's Web site, which contains the 2018 financial statements of Zeiber Corporation. Forecast Zeiber's 2019 income statement and balance sheets Use the following assumptions: 7 (1) Sales grow by 6 % (2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, 10 and inventories to sales will be the same in 2019 as in 2018. 11 (3) Zeiber will not issue any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt and the interest expense on long-term debt is based on the average balance during the year. 12 13 14 (5) No interest is earned on cash. 15 (6) Regular dividends grow at an 8% rate 16 17 18 Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by drawing on a 19 line of credit with an interest rate of 12%. If surplus funds are available, pay a special dividend. 20 21 22 Key Input Data: Used in the forecast 23 24 Tax rate 25 Dividend growth rate 26 Rate on notes payable-term debt, r 40% 8% 9% 27 Rate on long-term debt, r 28 Rate on line of credit, rLoc 11% 12% 29 30 a. What are the forecasted levels of the line of credit and special dividends? (Hints: Create a column showing the 31 ratios for the current year; then create a new column showing the ratios used in the forecast. Also, create a 32 preliminary forecast that doesn't include any new line of credit or special dividends. Identify the financing deficit 33 or surplus in this preliminary forecast and then add a new column that shows the final forecast that includes any 34 new line of credit or special dividend.) 35 36 Begin by calculating the appropriate historical ratios in Column E. Then put these ratios and any other input ratios 37 in Column G. 38 39 Forecast the preliminary balance sheets and income statements in Column H. Don't include any line of credit or 40 special dividend in the preliminary forecast 41 42 After completing the preliminary forecast of the balance sheets and income statement, go to the area below the 43 preliminary forecast and identify the financing deficit or surplus. Then use Excel's IF statements to specify the |44 amount of any new line of credit OR special dividend (you should not have a new line of credit AND a special 45 dividend, only one or the other). 46 47 After specifying the amounts of the special dividend or line of credit, include the final forecast in column H next to 48 the column for the preliminary forecast (G). In this final forecast, be sure to include the effect of the special 49 dividend or line of credit. 50 Income Statements (December 31, in thousands of dollars) 2019 Input Ratios (use 2019 Preliminary forecast (doesn't include special dividend or LOC) 2019 Final forecast (includes special dividend or LOC) 2018 2018 Forecasting basis ratios) $455,150 $386,878 $14,565 $53,708 Sales Growth Sales 6.0% % of sales Expenses (excluding depr. & amort.) Depreciation and Amortization % of fixed assets EBIT $11,880 $0 Interest expense on long-term debt Interest rate Interest expense on line of credit Interest rate $41,828 $16,731 $25,097 T s (40%) Tax rate Net Income Common dividends (regular dividends) Special dividends Addition to retained earnings $12,554 Growth Zero in preliminary forecast $12,543 2019 Preliminary Balance Sheets (December 31, in thousands of dollars) forecast (doesn't include special 2019 Final forecast 2019 Input (includes special dividend or LOC) 2018 dividend or LOC) Forecasting basis ratios Assets: Cash $18,206 % of sales $100,133 $45,515 $163,854 $182,060 $345,914 % of sales Accounts Receivable Inventories % of sales Total current assets Fixed assets % of sales Total assets Liabilities and equity Accounts payable $31,861 $27,309 % of sales Accruals % of sales Line of credit $0 Zero in preliminary forecast $59,170 Total current liabilities $120,000 Same as previous $179,170 Long-term debt Total liabilities $60,000 $106,745 $166,745 $345,914 Common stock Retained Earnings Total common equity Same as previous PreviousAddition to RE Total liabilities and equity $0 $0 Balance Sheet Check Total Assets Total Liabilities & Equity Identify Financing Deficit or Surplus Increase in spontaneous liabilities (accounts payable and accruals) + Increase in long-term bonds, preferred stock and common stock +Net income (in preliminary forecast) minus regular common dividends Increase in financing - Increase in total assets Amount of financing deficit or surplus: Use if state ment. Use if) statement If deficit in financing (negative), show the amount for the line of credit If surplus in financing (positive), show the amount of the special dividend a. What are the forecasted levels of the line of credit and special dividends with a 6% growth in sales? Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit (assume a value of zero for G:H60). Note: copyand paste exact values from H104:H105 when sales growth in F55 6% . Required line of credit Special dividends Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance s heet balances (H92-0). b. Now assume that the growth in sales is only 3 % (do this by changing the growth rate in Cell F58). What are the forecasted levels of line of credit and special dividends? Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit (assume a value of zero for G:H60) Required line of credit Special dividends Note: copy and paste exact values from H104:H105 when sales growth in F55 3 %. Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). c. Now assume that the growth in sales is 6% (do this by changing the growth rate in Cell F58). What are the forecasted levels of line of credit and special dividends? Assume that any draw on the line of credit will be made throughout the year, so there will be additional interest expense for the new line of credit. The interest expense will be calculated based on the average line of credit during the year. Required line of credit Special dividends Note: copy and paste exact value from H84 $0 after using the Goal Seek function when sales growth in F55 = 6 % Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). If H92 # 0, then use Goal Seek to get it to balance Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). If H92 #0, then use Goal Seek to get it to balance How to use the goal seek function to find the exact amount: 1) Type your initial estimate for the line of credit from G104 into cell H84 You'll notice that the balance sheet does not balance due to the financing feedback (see check in H92). 2) Go to Data What-If Analysis Goal Seek... 3) You want to find the exact amount for the line of credit that makes the balance sheet balance (i.e., total assets total liabilities total equity) This is your "goar cell. H92 is the cell that checks whether or not the balance sheet balances The balance sheet is balanced when the check (H92) is equal to zero (0) We want to change the amount of the line of credit (H84) until the balance sheet balances. Set cell: To Value By changing cell: Goal Seek Status Goal Seek ? X ? X Goal Seeking with Cell H92 SH$92 Set cell Step found a solution To yalue 0 Pause Target value C SHS84 By changing cell Current value: $0 Cancel OK OK Cancel d. Now assume that the growth in sales is only 3% ( do this by changing the growth rate in Cell F58). What are the forecasted levels of line of credit and special dividends? Assume that any draw on the line of credit will be made throughout the year, so there will be additional interest expense for the new line of credit. The interest expense will be calculated based on the average line of credit during the year. Required line of credit Note: copy and paste exact values from H66 after using the goal seek (if required) when sales growth in F55 3% Special dividends Input the line of credit amount and the special dividend amount into the appropriate cells (H84, H66) to make sure the balance sheet balances (H92-0). If H92 #0, then use Goal Seek to get it to balance Why does the financing feedback impact the line of credit but not the special dividends