Consider the financial statements for New England Corporation provided below. The company expects sales to increase by
Question:
Consider the financial statements for New England Corporation provided below. The company expects sales to increase by 25% in 2021. Its applicable tax rate in 2020 is expected to be 21% (note that this is significantly less than the rate implied by the Income Statement for 2020). Its dividend payout ratio in 2021 will be exactly the same as what it is in 2020. Accounts payable are the only “spontaneous liability” for this firm. New England’s management plans to raise any funding needed for growth through long-term debt only. Its current interest rate on its existing short-term and long-term debt will remain the same for 2021, and it does not propose to pay down any of its existing short-term or long-term debt (so, effectively, it will be able to “roll over” its existing short-term debt at the same rate as it is paying currently). On any new long-term borrowings in 2021, New England’s creditors have indicated that they will charge 7.25%.
Based on all the information provided estimate New England Corporation’s EFN for 2021 using the “percentage of sales method”.
New England Corporation | |
Income Statement ($ thousands) | 2020 |
Sales | $95,023 |
Cost of goods sold | 63,186 |
SG&A expense | 8,241 |
Depreciation expense | 6,106 |
EBIT | 17,490 |
Interest expense | 6,724 |
EBT | 10,766 |
Taxes | 5,092 |
Net income | 5,674 |
Allocation of net income: | |
Dividends | $2,921 |
Addition to retained earnings | $2,753 |
Balance Sheet ($ thousands) | 31-Dec-20 |
ASSETS | |
Current assets | |
Cash and marketable securities | $7,916 |
Accounts receivable | $22,854 |
Inventory | $30,991 |
Total current assets | $61,761 |
Net PPE | 331,083 |
Total assets | $392,844 |
LIABILITIES AND EQUITY | |
Current liabilities | |
Accounts payable | $63,250 |
Short-term debt | $53,258 |
Total current liabilities | $116,508 |
Long-term debt | $58,757 |
Total liabilities | $175,265 |
Shareholders' equity | |
Common Stock & Paid-In Capital | $147,400 |
Retained earnings | $70,179 |
Total shareholders' equity | $217,579 |
Total liabilities and shareholders' equity | $392,844 |
Fundamental Managerial Accounting Concepts
ISBN: 978-1259569197
8th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds