The Landis Corporation had 2008 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5%
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 15
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Net fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . 40
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 15
Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Profit margin after taxes . . . . . . . . . . . . . . . . . . 6%
The dividend payout rate is 50 percent of earnings, and the balance in retained earnings
at the end of 2008 was $33 million. Common stock and the company’s long-term
bonds are constant at $10 million and $5 million, respectively. Notes payable are currently
$12 million.
a. How much additional external capital will be required for next year if sales
increase 15 percent? (Assume that the company is already operating at full
capacity.)
b. What will happen to external fund requirements if Landis Corporation reduces
the payout 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 (that is, use the original information and part a in constructing your pro forma balance sheet).

To answer these questions, we need to calculate the change in balance sheet items that vary directly with sales, as well as the change in profit margin. We can then use these values to determine the additional external capital required and prepare a pro forma balance sheet for 2009.

a. Calculation of additional external capital required for next year if sales increase 15%:
The items that vary directly with sales are accounts receivable, inventory, and accounts payable. The profit margin after taxes also needs to be considered.

Given:
Sales increase = 15%
Profit margin after taxes = 6%
Balance sheet items that vary directly with sales:
Accounts receivable = 15%
Inventory = 25%
Accounts payable = 15%

Calculations:
Change in accounts receivable = Sales increase * Accounts receivable percentage = 15% * 15 = 2.25%
Change in inventory = Sales increase * Inventory percentage = 15% * 25 = 3.75%
Change in accounts payable = Sales increase * Accounts payable percentage = 15% * 15 = 2.25%
Change in profit margin = Sales increase * Profit margin percentage = 15% * 6 = 0.9%

The additional external capital required will be the sum of the changes in accounts receivable, inventory, accounts payable, and profit margin.

Additional external capital required = Change in accounts receivable + Change in inventory + Change in accounts payable + Change in profit margin
= 2.25% + 3.75% + 2.25% + 0.9%
= 9.15%

Therefore, if sales increase 15%, the Landis Corporation will require an additional external capital of 9.15%.

b. Impact on external fund requirements:
- If Landis Corporation reduces the payout ratio:
A lower payout ratio means that more earnings are retained, which reduces the need for external funds.
- If Landis Corporation grows at a slower rate:
A slower growth rate means that the change in balance sheet items and profit margin will be smaller, resulting in reduced external fund requirements.
- If Landis Corporation suffers a decline in its profit margin:
A lower profit margin means that the change in profit margin will be negative, potentially increasing the external fund requirements.

c. Preparation of pro forma balance sheet for 2009:
Using the original information and the calculation from part a, we can prepare a pro forma balance sheet for 2009. The additional external funds required will be in the form of notes payable.

Assuming that all balance sheet items other than those mentioned in the question remain constant, we can calculate the changes in those items based on the additional external capital required.

Pro forma balance sheet for 2009:

Assets:
Cash = 5% of sales + additional notes payable
Accounts receivable = 15% of sales + additional notes payable
Inventory = 25% of sales + additional notes payable
Net fixed assets = Constant value of 40% of sales
Total assets = Sum of the above balances

Liabilities and Equity:
Accounts payable = 15% of sales + additional notes payable
Accruals = Constant value of 10% of sales
Notes payable = Constant value of $12 million + additional notes payable
Total liabilities = Sum of the above balances
Common stock = Constant value of $10 million
Retained earnings = Retained earnings at end of 2008 + Net income - Dividends
Total equity = Sum of the above balances
Total liabilities and equity = Total liabilities + Total equity

By plugging in the appropriate values, you can calculate the pro forma balance sheet for 2009.