Excess capacity
Krogh Lumber's 2016 financial statements are shown here.
Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars) Cash $1,800 Accounts payable $7,200 Receivables 10,800 Notes payable 3,472 Inventories 12,600 Accrued liabilities 2,520 Total current assets $25,200 Total current liabilities $13,192 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 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
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 61% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.
%
Now suppose 2017 sales increase by 20% 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 84% 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 long-term debt) is 10%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.
Krogh Lumber Pro Forma Income Statement December 31, 2017 (Thousands of Dollars) 2016 2017 Sales $36,000 $ Operating costs (includes depreciation) 30,783 $ EBIT $5,217 $ Interest expense 1,017 $ EBT $4,200 $ Taxes (40%) 1,680 $ Net Income $2,520 $ Dividends $1,512 $ Addition to RE $1,008 $
Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars) 2016 2017 Cash $1,800 $ Accounts receivable 10,800 $ Inventories 12,600 $ Fixed assets 21,600 $ Total assets $46,800 $ Payables + accruals $9,720 $ Short-term bank loans 3,472 $ Total current liabilities $13,192 $ Long-term bonds 5,000 $ Total debt $18,192 $ Common stock 2,000 $ Retained earnings 26,608 $ Total common equity $28,608 $ Total liab. and equity $46,800 $
Excess capacity
Krogh Lumber's 2016 financial statements are shown here.
| Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars) | ||||
| Cash | $1,800 | Accounts payable | $7,200 | |
| Receivables | 10,800 | Notes payable | 3,472 | |
| Inventories | 12,600 | Accrued liabilities | 2,520 | |
| Total current assets | $25,200 | Total current liabilities | $13,192 | |
| 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 | 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 | ||
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 61% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.
%
Now suppose 2017 sales increase by 20% 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 84% 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 long-term debt) is 10%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.
| Krogh Lumber Pro Forma Income Statement December 31, 2017 (Thousands of Dollars) | ||
| 2016 | 2017 | |
| Sales | $36,000 | $ |
| Operating costs (includes depreciation) | 30,783 | $ |
| EBIT | $5,217 | $ |
| Interest expense | 1,017 | $ |
| EBT | $4,200 | $ |
| Taxes (40%) | 1,680 | $ |
| Net Income | $2,520 | $ |
| Dividends | $1,512 | $ |
| Addition to RE | $1,008 | $ |
| Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars) | ||
| 2016 | 2017 | |
| Cash | $1,800 | $ |
| Accounts receivable | 10,800 | $ |
| Inventories | 12,600 | $ |
| Fixed assets | 21,600 | $ |
| Total assets | $46,800 | $ |
| Payables + accruals | $9,720 | $ |
| Short-term bank loans | 3,472 | $ |
| Total current liabilities | $13,192 | $ |
| Long-term bonds | 5,000 | $ |
| Total debt | $18,192 | $ |
| Common stock | 2,000 | $ |
| Retained earnings | 26,608 | $ |
| Total common equity | $28,608 | $ |
| Total liab. and equity | $46,800 | $ |
Related questions
Basic Financial Ratios
The accounting staff of CCB Enterprises has completed the financial statements for the 2016 calendar year. The statement of income for the current year and the comparative statements of financial position for 2016 and 2015 follow.
| CCB Enterprises | |
| Statement of Income | |
| For the Year Ended December 31, 2016 | |
| (thousands omitted) | |
| Revenue: | |
| Net sales | $794,620 |
| Other | 58,420 |
| Total revenue | $853,040 |
| Expenses: | |
| Cost of goods sold | $530,320 |
| Research and development | 24,480 |
| Selling and administrative | 155,320 |
| Interest | 19,600 |
| Total expenses | $729,720 |
| Income before income taxes | $123,320 |
| Income taxes | 49,328 |
| Net income | $73,992 |
| CCB Enterprises | ||
| Comparative Statements of Financial Position | ||
| December 31, 2016 and 2015 | ||
| (thousands omitted) | ||
| 2016 | 2015 | |
| Assets | ||
| Current assets: | ||
| Cash and short-term investments | $25,910 | $20,860 |
| Receivables, less allowance for doubtful accounts | ||
| ($1,130 in 2016 and $1,410 in 2015) | 48,190 | 50,300 |
| Inventories, at lower of FIFO cost or market | 64,860 | 62,100 |
| Prepaid items and other current assets | 5,220 | 3,280 |
| Total current assets | $144,180 | $136,540 |
| Other assets: | ||
| Investments, at cost | $105,880 | $105,880 |
| Deposits | 10,160 | 7,980 |
| Total other assets | $116,040 | $113,860 |
| Property, plant, and equipment: | ||
| Land | $12,100 | $12,100 |
| Buildings and equipment, less accumulated depreciation | ||
| ($126,330 in 2016 and $122,240 in 2015) | 268,840 | 247,870 |
| Total property, plant, and equipment | $280,940 | $259,970 |
| Total assets | $541,160 | $510,370 |
| Liabilities and Ownersâ Equity | ||
| Current liabilities: | ||
| Short-term loans | $22,180 | $23,900 |
| Accounts payable | 72,240 | 71,070 |
| Salaries, wages, and other | 26,300 | 26,780 |
| Total current liabilities | $120,720 | $121,750 |
| Long-term debt | $160,620 | $171,030 |
| Total liabilities | $281,340 | $292,780 |
| Ownersâ equity: | ||
| Common stock, at par | $43,840 | $42,010 |
| Paid-in capital in excess of par | 64,020 | 61,260 |
| Total paid-in capital | $107,860 | $103,270 |
| Retained earnings | 151,960 | 114,320 |
| Total ownersâ equity | $259,820 | $217,590 |
| Total liabilities and ownersâ equity | $541,160 | $510,370 |
Required:
1. Calculate the following financial ratios for 2016 for CCB Enterprises:
Round items h, j, and k to the nearest whole number. Round all other answers to two decimal places. Assume a 360-day year.
| a. Times interest earned | to 1 |
| b. Return on total assets | % |
| c. Return on common stockholders' equity | % |
| d. Debt-to-equity ratio (at December 31, 2016) | to 1 |
| e. Current ratio (at December 31, 2016) | to 1 |
| f. Quick (acid-test) ratio (at December 31, 2016) | to 1 |
| g. Accounts receivable turnover ratio (Assume that all sales are on credit.) | times |
| h. Number of days' sales in receivables | days |
| i. Inventory turnover ratio (Assume that all purchases are on credit.) | times |
| j. Number of days' sales in inventory | days |
| k. Number of days in cash operating cycle | days |
2. Which of the following statements pertaining to ratio analysis of CCB Enterprises is true?
All of these are true.
