Solution to Ch12 P10 Build a Model

Chapter 12. Solution for Ch 12-10 Build a Model

Zieber Corporation's 2010 financial statements are shown below. Forecast Zeiber's 2011 income statement and balance sheets. Use the following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, and inventories to sales will be the same in 2011 as in 2010. (3) Zeiber will not issue any new stock or new long-term bonds. (4) The interest rate is 9% for short-term debt and 11% for long-term debt. (5) No interest is earned on cash. (6) Dividends grow at an 8% rate. (6) Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised as notes payable. Assume that any new notes payable will be borrowed on the last day of the year, so there will be no additional interest expense for the new notes payable. If surplus funds are available, pay a special dividend. a. What are the forecasted levels of notes payable and special dividends?

Key Input Data: Tax rate Dividend growth rate S-T rd L-T rd

Used in the forecast 40% 8% 9% 11%

December 31 Income Statements: (in thousands of dollars)

Sales Expenses (excluding depr. & amort.) EBITDA Depreciation and Amortization EBIT Net Interest Expense EBT Taxes (40%) Net Income Common dividends (regular dividends) Special dividends Addition to retained earnings (DRE)

Forecasting 2010 2010 basis Ratios $455,150 Growth $386,878 % of sales 85.000% $68,273 $14,565 % of fixed assets 8.000% $53,708 $11,880 Interest rate x beginning of year debt $41,828 $16,731 $25,097 $12,554 Growth

2011 Inputs 6.00% 85.00% 8.00%

8.00%

$12,543

2011 Forecast $482,459 $410,090 $72,369 $15,439 $56,930 $13,200 $43,730 $17,492 $26,238 $13,558 $0 $12,680

December 31 Balance Sheets (in thousands of dollars) 2010 Assets: Cash Accounts Receivable Inventories Total current assets Fixed assets

$18,206 $100,133 $45,515 $163,854 $182,060

Forecasting basis

2010 Ratios

2011 Inputs

% of sales % of sales % of sales

4.000% 22.000% 10.000%

4.000% 22.000% 10.000%

% of sales

40.000%

40.000%

Without AFN $19,298 $106,141 $48,246 $173,685 $192,984

2011 AFN

Total assets Liabilities and equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained Earnings Total common equity Total liabilities and equity

$345,914

$31,861 % of sales $27,309 % of sales $0 Previous $59,170 $120,000 Previous $179,170 $60,000 Previous $106,745 Previous + DRE $166,745 $345,914 $0.000

Total assets = Planned liabilities and equity = Additional funds needed (AFN) = Required additional notes payable = Special dividends

$366,669

7.000% 6.000%

7.000% 6.000%

$33,772 $28,948 $0 $62,720 $120,000 $182,720 $60,000 $119,424 $179,424 $362,144 $366,669 $362,144 $4,525 $4,525 $0

$4,525