Broussard Skateboard’s sales are expected to increase by 25% from $7.2 million in 2019 to $9.00 million in 2020. Its assets totaled $3 million at the end of 2019.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 55%. Use the AFN equation to forecast Broussard’s additional funds needed for the coming year. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.

Projected Operating Assets
Berman & Jaccor Corporation’s current sales and partial balance sheet are shown below.
This year
Sales $ 1,000
Balance Sheet: Assets
Cash $ 200
Short-term investments $ 135
Accounts receivable $ 150
Inventories $ 200
Total current assets $ 685
Net fixed assets $ 600
Total assets $ 1,285
Sales are expected to grow by 14% next year. Assuming no change in operations from this year to next year, what are the projected total operating assets? Do not round intermediate calculations. Round your answer to the nearest dollar.
Projected Spontaneous Liabilities
Smiley Corporation’s current sales and partial balance sheet are shown below.
This year
Sales $ 10,000
Balance Sheet: Liabilities
Accounts payable $ 1,500
Notes payable $ 2,000
Accruals $ 1,600
Total current liabilities $ 5,100
Long-term bonds $ 2,000
Total liabilities $ 7,100
Common stock $ 1,500
Retained earnings $ 3,000
Total common equity $ 4,500
Total liabilities & equity $ 11,600
Sales are expected to grow by 12% next year. Assuming no change in operations from this year to next year, what are the projected spontaneous liabilities? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
Forecasted Statements and Ratios
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton’s balance sheet as of December 31, 2019, is shown here (millions of dollars):
Cash $ 3.5 Accounts payable $ 9.0
Receivables 26.0 Notes payable 18.0
Inventories 58.0 Line of credit 0
Total current assets $ 87.5 Accruals 8.5
Net fixed assets 35.0 Total current liabilities $ 35.5
Mortgage loan 6.0
Common stock 15.0
Retained earnings 66.0
Total assets $122.5 Total liabilities and equity $122.5
Sales for 2019 were $450 million and net income for the year was $13.5 million, so the firm’s profit margin was 3.0%. Upton paid dividends of $5.4 million to common stockholders, so its payout ratio was 40%. Its tax rate was 25%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2020. Do not round intermediate calculations.
● If sales are projected to increase by $112.5 million, or 25%, during 2020, use the AFN equation to determine Upton’s projected external capital requirements. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.
$ million
● Using the AFN equation, determine Upton’s self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
%
● Use the forecasted financial statement method to forecast Upton’s balance sheet for December 31, 2020. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton’s profit margin and dividend payout ratio will be the same in 2020 as they were in 2019. What is the amount of the line of credit reported on the 2020 forecasted balance sheets? (Hint: You don’t need to forecast the income statements because the line of credit is taken out on the last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2020 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answers to two decimal places.
Upton Computers
Pro Forma Balance Sheet
December 31, 2020
(Millions of Dollars)

Cash $
Receivables $
Inventories $
Total current assets $
Net fixed assets $
Total assets $
Accounts payable $
Notes payable $
Line of credit $
Accruals $
Total current liabilities $
Mortgage loan $
Common stock $
Retained earnings $
Total liabilities and equity $

Financing Deficit
Garlington Technologies Inc.’s 2019 financial statements are shown below:
Income Statement for December 31, 2019
Sales $4,000,000
Operating costs 3,200,000
EBIT $ 800,000
Interest 120,000
Pre-tax earnings $ 680,000
Taxes (25%) 170,000
Net income 510,000
Dividends $ 190,000
Balance Sheet as of December 31, 2019
Cash $ 160,000 Accounts payable $ 360,000
Receivables 360,000 Line of credit 0
Inventories 720,000 Accruals 200,000
Total CA $1,240,000 Total CL $ 560,000
Fixed assets 4,000,000 Long-term bonds 1,000,000
Total Assets $5,240,000 Common stock 1,100,000
RE 2,580,000
Total L&E $5,240,000
Suppose that in 2020 sales increase to $4.8 million and that 2020 dividends will increase to $164,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2019. The long-term bonds have an interest rate of 8%. New financing will be with a line of credit. Assume it will be added at the end of the year. Cash does not earn any interest income. Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.
Garlington Technologies Inc.
Pro Forma Income Statement
December 31, 2020
Sales $
Operating costs $
EBIT $
Interest $
Pre-tax earnings $
Taxes (25%) $
Net income $
Dividends: $
Addition to RE: $

Garlington Technologies Inc.
Pro Forma Balance Statement
December 31, 2020
Cash $
Receivables $
Inventories $
Total current assets $
Fixed assets $
Total assets $
Accounts payable $
Line of credit $
Accruals $
Total current liabilities $
LT bonds $
Common stock $
Retained earnings $
Total L&E $
Agency Conflicts
Firms must provide the right incentives if they are to get select a.shareholders b.creditors c.managers to focus on long-run value maximization. Conflicts exist between managers and stockholders and between stockholders (represented by managers) and -Select a.employees b.debtholders c.customers 2 . Managers’ personal goals may compete with shareholder wealth maximization. However, managers can be motivated to act in their stockholders’ best interests through (1) reasonable -Select a. Vacation b.compensation c.perquisite packages, (2) firing of underperforming managers, and (3) the threat of hostile takeovers. If a firm’s stock is undervalued, corporate raiders will see it as a bargain and will attempt to capture the firm in a hostile takeover.

Select a. Stockholders b. Bondholders generally receive fixed payments regardless of how well the firm does, while -Select a. Stockholders b. Bondholders earn higher returns when the firm’s earnings are higher. Investments in -Select a.risky b.safe ventures, that have great payoffs to stockholders if successful but threaten bankruptcy if they fail, create conflicts. In addition, the use of additional -Select a. Equity b.debt c.assets increases stockholder/debtholder conflicts. Consequently, bondholders attempt to protect themselves by including Select a.ethics b.covenants c. compensation in bond agreements that limit firms’ use of additional -Select-equitydebtassetsItem 9 and constrain -Select a.customers b.employees c.managers actions.

Judd Enterprises
These are the simplified financial statements for Judd Enterprises.
Income statement Current Projected
Sales na 1,000
Costs na 720
Profit before tax na 280
Taxes (25%) na 70
Net income na 210
Dividends na 63

Balance sheets Current Projected Current Projected
Current assets 100 115 Current liabilities 70 81
Net fixed assets 900 1,080 Long-term debt 400
Common stock 300
Retained earnings 230

Refer to the Judd Enterprises financial statements. What is Judd’s projected retained earnings under this plan?

a. $339
b. $377
c. $415
d. $440
e. $396

The term “additional funds needed (AFN)” is generally defined as follows:
a. The amount of assets required per dollar of sales.
b. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
c. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
d. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.

e. Funds that are obtained automatically from routine business transactions.

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
a. The company’s profit margin increases.
b. The company begins to pay employees monthly rather than weekly.
c. The company increases its dividend payout ratio.
d. The company decides to stop taking discounts on purchased materials.
e. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.

Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company’s operations next year, and he wants you to forecast the firm’s additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.
Last year’s sales = S0 $350 Last year’s accounts payable $40
Sales growth rate = g 30% Last year’s notes payable $50
Last year’s total assets = A0* $790 Last year’s accruals $30
Last year’s profit margin = PM 5% Target payout ratio 60%
Select the correct answer.
a. $206.9
b. $211.7
c. $204.5
d. $209.3
e. $202.1