Please see attachment.
Equivalency of the External Funds Needed (EFN) equation and pro-formas:
Balance sheet and Income Statement Information:
December 31, 2002
Current Assets $500 Short Term Debt $300
Fixed Assets $550 Long Term Debt $200
Total Assets $1050 Equity $550
Total Liab. & Equity $1050
December 31, 2002
Sales Revenue $1200
NIAT $ 100
Dividends $ 40
Assume sales are projected to rise by 20% for the year 2003. Net profit margin on sales and dividend payout ratios will remain constant. The only assets that are spontaneous (rise proportionally with sales) are current assets, and the only liabilities that are spontaneous (rise proportionally with sales) are current liabilities.
a) Use the EFN equation to generate an estimate of the amount of additional, external funding the firm will require in 2003
b) Develop pro-forma income statements and balance sheets for the year 2003. Your pro-formas should show only the same accounts shown above (they obviously do not need to be detailed). Clearly show the plug number which makes your pro-forma balance sheet balance.
c) Compare the plug number in part (b) with the EFN estimate in part (a).
Please see the attached file.
A) Projected sales =Sales for the year 2002 120% =$1200*120% =$1440
Net profit margin ratio = NIAT /Sales = $100/$1200 = 8.33%
Dividend payout ratio = Dividend / NIAT = $40/$100 =40%
Expected profit = Projected sales net profit margin = $1440 *8.33% = $120
Expected dividend =Expected Profit *Dividend payout ratio = $120* 40% =$48
Addition to retained earnings = ...
Word document contains EFN equation,pro-forma income statements and balance sheets Tthe plug number which makes pro-forma balance sheet balance is clearly shown.
Oats 'R' Us: growth rate, debt equity ratio, full capacity, external financing
Growing Pains - External Financing
Case 4 Growing Pains
"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!
I attached the financial statements.
Need to see and understand each calculation and show all work
2. If Oats 'R' Us is operating its fixed assets at full capacity,
what growth rate can it support without the need for any
additional external financing?
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.
4. Initially Jim assumes that the firm is operating at full
capacity. How much additional financing will it need to
support revenue growth rates ranging from 25% to 40% per
5. After conducting an interview with the production manager,
Jim realizes that Oats 'R' Us is operating its plant at 90%
capacity, how much additional financing will it need to
support growth rates ranging from 25% to 40%?
6. What are some actions that Mason can take in order to
alleviate some of the need for external financing? Analyze
the feasibility and implications of each suggested action.
7. How critical is the financial condition of Oats 'R' Us? Is
Vicky justified in being concerned about the need for
financial planning? Explain why.
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).