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    Oats 'R' Us planning for future growth: debt equity ratio, plant capacity, pro-forma info

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    Questions, 3, 5 & 8 Need help with these questions.

    "We must plan for the future," said Vicky. "I think we've been
    playing it by ear for too long." Mason immediately called the treasurer,
    Jim Moroney. "Jim, I need to know how much additional funding we are
    going to need for the next year," said Mason. "The growth rate of
    revenues should be between 25% and 40%. I would really appreciate if
    you can have the forecast on my desk by early next week."

    Jim knew that his fishing plans for the weekend had better be put
    aside since it was going to be a long and busy weekend for him. He
    immediately asked the accounting department to give him the last three
    years' financial statements (see Tables 1 and 2) and got right to work!

    Questions:

    3. Oats 'R' Us has a flexible credit line with the Midway Bank.
    If Mason decides to keep the debt-equity ratio constant, up to
    what rate of growth in revenue can the firm support? What
    assumptions are necessary when calculating this rate of
    growth? Are these assumptions realistic in the case of Oats
    'R' Us? Please explain.

    5. After conducting an interview with the production manager,
    Jim realizes that Oats 'R' Us is operating its plant at 90%

    8. Given that Mason prefers not to deviate from the firm's 2004
    debt-equity ratio, what will the firm's pro-forma income
    statement and balance sheet look like under the scenario of
    40% growth in revenue for 2005 (ignore feedback effects).

    Oats 'R' Us
    Balance Sheet
    For the Year Ended Dec. 31st 2004
    2,004 2,003 2,002
    Assets
    Cash and Cash Equivalents 60,000 97,376 48,000
    Accounts Receivable 250,416 175,000 150,000
    Inventory 511,500 390,000 335,000
    Total Current Assets 821,916 662,376 533,000

    Plant & Equipment 560,000 560,000 560,000
    Accumulated Depreciation (175,000) (150,000) (125,000)
    Net Plant & Equipment 385,000 410,000 435,000
    Total Assets 1,206,916 1,072,376 968,000

    Liabilities and Owner's Equity
    Accounts Payable 135,000 151,352 128,000
    Notes Payable 275,000 275,000 250,000
    Other Current Liabilities 43,952 50,000 46,000
    Total Current Liabilities 453,952 476,352 424,000

    Long-term Debt 275,000 250,000 300,000
    Total Liabilities 728,952 726,352 724,000

    Owner's Capital 155,560 155,560 155,560
    Retained Earnings 322,404 190,464 88,440
    Total Liabilities and Owner's Equity 1,206,916 1,072,376 968,000

    Income Statement
    For the Year Ended Dec. 31st 2004 2004 2003 2002

    Sales 4,700,000 3,760,000 3,000,000
    Cost of Sales 3,877,500 3,045,600 2,400,000
    Gross Operating Profit 822,500 714,400 600,000
    Administrative Expenses 275,000 250,000 215,000
    Fixed Expenses 90,000 90,000 90,000
    Depreciation 25,000 25,000 25,000
    EBIT 432,500 349,400 270,000
    Interest Expense 66,000 66,000 66,000
    Earnings Before Taxes 366,500 283,400 204,000
    Taxes @40% 146,600 113,360 81,600
    Net Income 219,900 170,040 122,400
    Retained Earnings 131,940 102,024 73,440
    ---

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    3. Oats 'R' Us has a flexible credit line with the Midway Bank. If Mason decides to keep the debt-equity ratio constant, up to what rate of growth in revenue can the firm support? What assumptions are necessary when calculating this rate of growth? Are these assumptions realistic in the case of Oats 'R' Us? Please explain.

    There are three rates of growth that we can calculate from the figures. The overall current rate that is 28.33333 the 2003 growth rate is 25.33333 and the 2004 growth rate is 27.31481. Please see the excel sheet for the scratch work. If Mason decides to keep the debt equity ratio constant then we can say that his rate of growth in revenue can be the maximum of 28.33333. This is not very practical because to calculate this figure we have used the 2002 revenue figure as the base figure, the 2004 growth rate ...

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