Chapter 16, Problem 14P

EXCESS CAPACITY Krogh Lumber’s 2016 financial statements are shown here.

Krogh Lumber Balance Sheet as of December 31, 2016 (Thousands of Dollars)

Krogh Lumben Income Statement for December 31, 2016 (Thousands of Dollars)

Sales	$36,000
Operating costs including depredation	30,783
Earnings before interest and taxes	$ 5,217
Interest	1,017
Earnings before taxes	$ 4,200
Taxes (40%)	1,680
Net income	$ 2,520
Dividends (60%)	$ 1,512
Addition to retained earnings	$ 1,008

1. 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?
2. 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 forecasts that its before-tax cost of debt (which includes both short- and long­term debt) is 11%. Any stock issuances or repurchases will be made at the firm’s 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 retained earnings?