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Percentage of Sales Models

9. Percentage of Sales Models. Here are the abbreviated financial statements for Planners Peanuts:

If sales increase by 20 percent in 2001, and the company uses a strict percentage of sales planning model (meaning that all items on the income and balance sheet also increase by 20 percent), what must be the balancing item? What will be its value?

10. Required External Financing. If the dividend payout ratio in problem 9 is fixed at 50 percent, calculate the required total external financing for growth rates in 2001 of 15 percent, 20 percent, and 25 percent.

11. Feasible Growth Rates. What is the maximum possible growth rate for Planners Peanuts (see problem 9) if the payout ratio remains at 50 percent and a. no external debt or equity is to be issued

b. the firm maintains a fixed debt ratio but issues no equity

12. Using Percentage of Sales. Eagle Sports Supply has the following financial statements. Assume that Eagle`s assets are proportional to its sales.

a. Find Eagle`s required external funds if it maintains a dividend payout ratio of 60 percent and plans a growth rate of 15 percent in 2001.

b. If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? What will its value be?

c. Now suppose that the firm plans instead to increase long-term debt only to $1,100 and does not wish to issue any new shares of stock. Why must the dividend payment now be the balancing item? What will its value be?

13. Feasible Growth Rates.

a. What is the internal growth rate of Eagle Sports (see problem 12) if the dividend payout ratio is fixed at 60 percent and the equity-to-asset ratio is fixed at 2вБД3?

b. What is the sustainable growth rate?

14. Building Financial Models. How would Executive Fruit`s financial model change if the dividend payout ratio were cut to 1вБД3? Use the revised model to generate a new financial plan for 2000 assuming that debt is the balancing item. Show how the financial statements given in Table 1.16 would change. What would be required external financing?

15. Required External Financing. Executive Fruit`s financial manager believes that sales in 2000 could rise by as much as 20 percent or by as little as 5 percent. a. Recalculate the first-stage pro forma financial statements (Table 1.15) under these two assumptions. How does the rate of growth in revenues affect the firm`s need for external funds?

b. Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet.

16. Building Financial Models. The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (that is, assets net of depreciation) by $200,000 per year for the next 5 years and forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10 percent of net fixed assets at the start of the year. Fixed costs are expected to remain at $56,000 and variable costs at 80 percent of revenue. The company`s policy is to pay out two- thirds of net income as dividends and to maintain a book debt ratio of 25 percent of total capital.

a. Produce a set of financial statements for 2001. Assume that net working capital will equal 50 percent of fixed assets.

b. Now assume that the balancing item is debt, and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2001. What is the projected debt ratio for 2001?