ADDITIONAL FUNDS NEEDED

ADDITIONAL FUNDS NEEDED Morrissey Technologies Inc.'s 2016 financial statements are shown here. Morrissey Technologies Inc.: Balance Sheet as of December 31, 2016 Cash $180,000 Accounts payable $360,000 Receivables 360,000 Notes payable 56,000 Inventories 720,000 Accrued liabilities 180,000 Total current assets $1,260,000 Total current liabilities $596,000 Long-term debt 100,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and $2,700,000 equity Morrissey Technologies Inc.: Income Statement for December 31, 2016 Sales $3,600,000 Operating costs including 3,279,720 depreciation EBIT $320,280 Interest 20,280 EBT $300,000 Taxes (40%) 120,000 Net Income $180,000 $45.00 Per Share Data: Common stock price Earnings per share (EPS) Dividends per share (DPS) $1.80 $1.08 Suppose that in 2017, sales increase by 15% over 2016 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2016 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 88% 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 2017 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-term and long-term debt) is 13%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45. a. Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent. Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2017 2016 2017 Sales $3,600,000 3,279,720 Operating costs (includes depreciation) EBIT $320,280 20,280 Interest expense EBT Taxes (40%) Net Income $300,000 120,000 $180,000 Dividends A Addition to retained earnings $ Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2017 2016 2017 Assets Cash $180,000 Accounts receivable 360,000 Inventories 720,000 Fixed assets 1,440,000 Total assets $2,700,000 Liabilities and Equity Payables + accruals Short-term bank loans Total current liabilities Long-term bonds Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity $540,000 56,000 $596,000 100,000 $696,000 1,800,000 204,000 $2,004,000 $2,700,000 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 firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places. ADDITIONAL FUNDS NEEDED Morrissey Technologies Inc.'s 2016 financial statements are shown here. Morrissey Technologies Inc.: Balance Sheet as of December 31, 2016 Cash $180,000 Accounts payable $360,000 Receivables 360,000 Notes payable 56,000 Inventories 720,000 Accrued liabilities 180,000 Total current assets $1,260,000 Total current liabilities $596,000 Long-term debt 100,000 Fixed assets 1,440,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and $2,700,000 equity Morrissey Technologies Inc.: Income Statement for December 31, 2016 Sales $3,600,000 Operating costs including 3,279,720 depreciation EBIT $320,280 Interest 20,280 EBT $300,000 Taxes (40%) 120,000 Net Income $180,000 $45.00 Per Share Data: Common stock price Earnings per share (EPS) Dividends per share (DPS) $1.80 $1.08 Suppose that in 2017, sales increase by 15% over 2016 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2016 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 88% 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 2017 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-term and long-term debt) is 13%. Assume that any common stock issuances or repurchases can be made at the firm's current stock price of $45. a. Construct the forecasted financial statements assuming that these changes are made. What are the firm's forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings? Round your answers to the nearest cent. Morrissey Technologies Inc. Pro Forma Income Statement December 31, 2017 2016 2017 Sales $3,600,000 3,279,720 Operating costs (includes depreciation) EBIT $320,280 20,280 Interest expense EBT Taxes (40%) Net Income $300,000 120,000 $180,000 Dividends A Addition to retained earnings $ Morrissey Technologies Inc. Pro Forma Balance Statement December 31, 2017 2016 2017 Assets Cash $180,000 Accounts receivable 360,000 Inventories 720,000 Fixed assets 1,440,000 Total assets $2,700,000 Liabilities and Equity Payables + accruals Short-term bank loans Total current liabilities Long-term bonds Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity $540,000 56,000 $596,000 100,000 $696,000 1,800,000 204,000 $2,004,000 $2,700,000 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 firm's sustainable growth rate? (Hint: Set AFN equal to zero and solve for g.) Round your answer to two decimal places