Q. Stevens Textiles 2009 statements are as follows: (millions of dollars) Cash $400 Accounts Payable $250 Receivables 605 Accruals 275 Inventories 495 Notes Payable (5%) 250 Total Current Assets 1500 Total Current Liabilities 775 Long-term Debt (12%) 400 Net Fixed Assets 2000 Common Stock 1000 Premium on Common Stock 655 Retained Earnings 670 Total Assets $3500 Total Debt and Equity $3500
Sales 800 Cost of goods sold 320 Gross profit 480 Selling expense 100 Depreciation 125 Operating income 255 Interest 60.5 Taxable income 194.5 Tax expense 58.35 Net income 136.15
Stevens expects its sales quantity to increase by 10% and expects a 5% rise in the selling price of its products. The companys is expecting an increase of $10 million in its selling expense. The company is planning to adopt an aggressive planning policy to speed up the collections; the receivables are expected to increase by 10% for the next year. Company expects its other current assets and operational current liabilities to increase proportionately with sales. The company expects to achieve a gross margin of 62.5%, current ratio of 1.75, debt- asset ratio of 40%. Currently, the company is using its fixed assets at maximum capacity. Net fixed assets have a remaining life of 16 years with zero salvage. The machine required for manufacturing companys product is available at a cost of $500 million (including installation costs) and will be depreciated using straight line depreciation over a period of 15 years and with a salvage of $50 million. Though this machine will be operating at 40% of its capacity but based on the sales forecasts over a 10-year period, this investment has a payback period of 6 years. The machine will be purchased at the beginning of 2010. The company is able to maintain 65% of dividend payout ratio for the last three years. For the year 2010, the company might change its payout ratio if needed but it doesnt want to dilute its common-equity through additional share insurance. Tax rate will remain same for 2010.
Requirements: 1. Ignoring the financing feedback, will the company be able to maintain its payout ratio at 65%. Prepare the forecasted income statement and balance sheet for Stevens. (Hint: compute the amounts to be financed through notes payable and long-term debt). 2. If the new rate on notes payable is 6.5% (the existing notes are also rolled over on this rate) and the new long-term debt can maintain to achieve its target ratios.