The management team at Taylor, Inc. is working on the company's 2019 pro-forma balance sheet and...

 

 

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The management team at Taylor, Inc. is working on the company's 2019 pro-forma balance sheet and income statement, and wishes to find out the amount of additional external funds it will need in 2019, based on the following assumptions: a. Sales are expected to double in 2019. b. The company is operating at full capacity. c. All operating assets (cash included) and spontaneous liabilities are expected to remain at their same proportion of sales as in 2018. Misc. assets (which are non- operating assets) will remain unchanged at $7,500. d. Cost of Goods Sold and Operating Expenses are also expected to remain equal in proportion of sales. e. Management expects Interest rates to fall in 2019 so that interest expenses will remain constant as a percentage of sales, even if the level of bank debt increases in 2019. In addition, assume that interest rates are the same for short-term and long-term debt. f. The company's tax rate is 40% and the firm does not pay dividends. 1) What are the Additional Funds Needed (AFN) for the year 2019, using both the AFN formula and a pro-forma balance sheet using the pct. of sales method? Both methods should give you the same result. 2) Now assume that, in 2019, while doubling its level of sales, the company wishes to improve its Days Payable to a more acceptable level of 60 days. What will then be the level of AFN? 3) In addition to reducing its Days Payable, the firm also wants to bring its Debt/Equity ratio as close as possible to, but not to exceed 2/1, and its current ratio as close as possible to, but not to fall below 2/1. How would this newly calculated level of AFN (from Question 2) be allocated among additional sources of funds, i.e., notes payable (N/P), long-term debt, and/or newly issued common stock? Assume that additional long-term debt and common stock can only be obtained in multiples of $50,000 (i.e., $50,000, $100,000, $250,000, etc., and not $75,000 or $125,000, etc.) Additional Notes Payable can be obtained in any amount. 4) Prepare your pro-forma Income Statement and Balance Sheet accordingly. For your ratios, assume a 365 day and use the following formulas: End of Year A/P Days Payable= COGS 365 End of Year Debt Equity End of Year Equity Note: The term "Debt" includes all forms of liabilities, not just bank debt. Please find below Taylor, Inc.'s financial statements for the past two years: Taylor, Inc. Debt B Cash Accounts Receivable Inventory Total Current assets Net Fixed assets Misc. Long-Term Assets Total Assets Notes Payable Accounts Payable Total Current Liabilities Long-Term Debt Total Liabilities Net Worth (Com. Eq. + R.E.) Total Liabilities & Net Worth Net Sales COGS Gross Profit Operating Expenses EBIT Interest Expense EBT Taxes Net Income 2017 15,000 180,000 360,000 2018 15,000 360,000 720,000 555,000 1,095,000 217,500 367,500 7,500 7,500 780,000 1,470,000 135,000 135,000 225,000 682,500 360,000 817,500 150,000 262,500 510,000 1,080,000 270,000 390,000 780,000 1,470,000 40,000 60,000 2,160,000 4,320,000 1,440,000 2,880,000 720,000 1,440,000 601,250 1,212,250 118,750 227,750 18,750 27,750 100,000 200,000 80,000 120,000 The management team at Taylor, Inc. is working on the company's 2019 pro-forma balance sheet and income statement, and wishes to find out the amount of additional external funds it will need in 2019, based on the following assumptions: a. Sales are expected to double in 2019. b. The company is operating at full capacity. c. All operating assets (cash included) and spontaneous liabilities are expected to remain at their same proportion of sales as in 2018. Misc. assets (which are non- operating assets) will remain unchanged at $7,500. d. Cost of Goods Sold and Operating Expenses are also expected to remain equal in proportion of sales. e. Management expects Interest rates to fall in 2019 so that interest expenses will remain constant as a percentage of sales, even if the level of bank debt increases in 2019. In addition, assume that interest rates are the same for short-term and long-term debt. f. The company's tax rate is 40% and the firm does not pay dividends. 1) What are the Additional Funds Needed (AFN) for the year 2019, using both the AFN formula and a pro-forma balance sheet using the pct. of sales method? Both methods should give you the same result. 2) Now assume that, in 2019, while doubling its level of sales, the company wishes to improve its Days Payable to a more acceptable level of 60 days. What will then be the level of AFN? 3) In addition to reducing its Days Payable, the firm also wants to bring its Debt/Equity ratio as close as possible to, but not to exceed 2/1, and its current ratio as close as possible to, but not to fall below 2/1. How would this newly calculated level of AFN (from Question 2) be allocated among additional sources of funds, i.e., notes payable (N/P), long-term debt, and/or newly issued common stock? Assume that additional long-term debt and common stock can only be obtained in multiples of $50,000 (i.e., $50,000, $100,000, $250,000, etc., and not $75,000 or $125,000, etc.) Additional Notes Payable can be obtained in any amount. 4) Prepare your pro-forma Income Statement and Balance Sheet accordingly. For your ratios, assume a 365 day and use the following formulas: End of Year A/P Days Payable= COGS 365 End of Year Debt Equity End of Year Equity Note: The term "Debt" includes all forms of liabilities, not just bank debt. Please find below Taylor, Inc.'s financial statements for the past two years: Taylor, Inc. Debt B Cash Accounts Receivable Inventory Total Current assets Net Fixed assets Misc. Long-Term Assets Total Assets Notes Payable Accounts Payable Total Current Liabilities Long-Term Debt Total Liabilities Net Worth (Com. Eq. + R.E.) Total Liabilities & Net Worth Net Sales COGS Gross Profit Operating Expenses EBIT Interest Expense EBT Taxes Net Income 2017 15,000 180,000 360,000 2018 15,000 360,000 720,000 555,000 1,095,000 217,500 367,500 7,500 7,500 780,000 1,470,000 135,000 135,000 225,000 682,500 360,000 817,500 150,000 262,500 510,000 1,080,000 270,000 390,000 780,000 1,470,000 40,000 60,000 2,160,000 4,320,000 1,440,000 2,880,000 720,000 1,440,000 601,250 1,212,250 118,750 227,750 18,750 27,750 100,000 200,000 80,000 120,000

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