Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars) Cash $ 1,800 $ 7,200 Accounts payable Accrued liabilities Receivables 10,800 2,520 Inventories 12,600 Notes payable 3,472 $13,192 Total current assets $25,200 Total current liabilities Mortgage bonds 5,000 Net fixed assets 21,600 Common stock 2,000 Retained earnings 26,608 Total assets $46,800 Total liabilities and equity $46,800 Krogh Lumber: Income Statement for December 31, 2016 (Thousands of Dollars) Sales $36,000 Operating costs including depreciation Earnings before interest and taxes 30,783 $ 5,217 Interest 1,017 $ 4,200 1,680 $ 2,520 Earnings before taxes Taxes (40%) Net income $ 1,512 $ 1,008 Dividends (60%) Addition to retained earnings
EXCESS CAPACITY Krogh Lumber’s 2016 financial statements are shown here.
a. Assume that the company was operating at full capacity in 2016 with regard to all items
except fixed assets; fixed assets in 2016 were being utilized to only 75% of capacity. By
what percentage could 2017 sales increase over 2016 sales without the need for an
increase in fixed assets?
b. Now suppose 2017 sales increase by 25% over 2016 sales. Assume that Krogh cannot
sell any fixed assets. All assets other than fixed assets will grow at the same rate as
sales; however, after reviewing industry averages, the firm would like to reduce its
operating costs/sales ratio to 82% and increase its total liabilities-to-assets ratio to
42%. The firm will maintain its 60% dividend payout ratio, and it currently has
1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted
interest-bearing debt as notes payable, and it will issue bonds for the remainder. The
firm
current stock price of $40. Develop Krogh’s projected financial statements like those
shown in Table 16.2. What are the balances of notes payable, bonds, common stock,
and
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