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External capital and pro forma balance sheet

The Landis corp. had 2004 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

Cash - 5%
Act/Rec - 15%
Inventory - 25%
Net fixed assets - 40%
Act/Pay - 15%
Accruals - 10%

Profit margin after taxes - 6%

The dividend payout rat is 50 percent of earnings, and the balance in retained earnings at the end of 2005 was $33 million. Common stock and the company's long- term bonds are constant at $10 million and $5 million, respectively. Notes payable are currently $12 million.

A. How much additional external capital will be required for next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.)

B. What will happen to external fund requirements if Landis Corp reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these separately.

C. Prepare a pro forma balance sheet for 2005 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part B in answering this question (that is, use the original information and part A in construction your pro forma balance sheet).

Solution Preview

The Landis corp. had 2004 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

Cash – 5%
Act/Rec – 15%
Inventory – 25%
Net fixed assets – 40%
Act/Pay – 15%
Accruals – 10%

Profit margin after taxes – 6%

The dividend payout rat is 50 percent of earnings, and the balance in retained earnings at the end of 2005 was $33 million. Common stock and the company’s long- term bonds are constant at $10 million and $5 million, respectively. Notes payable are currently $12 million.

A. How much additional external capital will be required for next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.)

B. What will happen to external fund requirements if Landis Corp reduces the ...

Solution Summary

External capital and pro forma balance sheet information is provided in this solution, including information regarding how much additional external capital will be required and what will happen to external fund requirements.

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