I am very lost with this assignment can someone please help me.
I just need one sample thank you.
The Lanford Corporation had 2008 sales of $110 million. The other pertinent
financial data for 2008 is as follows:
2008 Sales $110,000,000
Dividend Payout Rate 55%
Balance in Retained Earnings $41,150,000
Common Stock $11,000,000
Long-Term Bonds $3,550,000
Notes Payable $13,600,000
Profit Margin after Taxes 8.0%
The BALANCE SHEET items that vary directly with sales are as follows:
Cash 7%
Accounts Receivable 15%
Inventory 28%
Net Fixed Assets 36%
Accounts Payable 14%
Accruals 9%
The Comon Stock and the company's Long-Term Bonds will remain constant from 2008 through 2009 at $11 million and $3.55 million, respectiviely.
a. How much additional external capital will be required for next year if sales increase 15%? (Assume that the company is already running at full capacity).
b. What will happen to external fund requirements if Lanford reduces the payou 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 2009 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. Use the information in part A. to develop your pro forma balance sheet.
To answer these questions, we need to understand the relationship between sales and the balance sheet items, as well as the impact of financial ratios on external fund requirements.
a. To determine the additional external capital required, we need to calculate the change in each balance sheet item based on the 15% increase in sales.
1. Calculate the change in each balance sheet item:
- Cash: 7% of the increase in sales
- Accounts Receivable: 15% of the increase in sales
- Inventory: 28% of the increase in sales
- Net Fixed Assets: 36% of the increase in sales
- Accounts Payable: 14% of the increase in sales
- Accruals: 9% of the increase in sales
2. Add up the changes in each balance sheet item.
3. Subtract any increase in retained earnings (profit margin after taxes) from the total change.
The result will give you the additional external capital required for the next year.
b. To analyze the impact of different factors on external fund requirements, we need to consider three scenarios individually:
1. Reducing the dividend payout ratio: If the dividend payout ratio is reduced, more earnings will be retained, leading to increased retained earnings. This decrease in dividend payout ratio will reduce the need for additional external funds.
2. Slower growth rate: With a slower growth rate, the change in each balance sheet item will be smaller, resulting in reduced external fund requirements.
3. Decline in profit margin: A decline in profit margin means lower retained earnings, increasing the need for additional external funds.
c. To prepare a pro forma balance sheet for 2009, assuming any external funds acquired will be in the form of Notes Payable, we need to adjust the balance sheet based on the changes calculated in part a. Here's the process:
1. Start with the 2008 balance sheet provided.
2. Adjust the balance sheet items that vary directly with sales using the changes calculated in part a.
3. Add the additional external capital required as Notes Payable.
4. Update the other pertinent financial data (Common Stock and Long-Term Bonds remain constant).
5. Calculate the Total Liabilities and Shareholders' Equity to ensure it balances with the Total Assets.
Following these steps will enable you to prepare a pro forma balance sheet for 2009.