Page 31 of 35 Pages
Your company had the following balance sheet for 2007:
Liabilities & Equity
Total Common Equity
Total Liabilities & Equity
Now assume that in 2007, the company reported sales of $20 million, net income of
$400,000, and dividends of $300,000. Also assume that (1) the company anticipates its
sales will increase 20 percent in 2008, (2) its dividend payout will remain at 75 percent,
and (3) the company is at full capacity, and that all of its assets and spontaneous liabilities
will increase proportionately with an increase in sales.
Finally, assume the company uses the AFN formula
and all additional funds needed (AFN)
will come from issuing new long-term debt. Given its forecast, and ignoring financing
feedback effects, determine how much long-term debt the company will need to issue in
You are given below the 2007 year-end financial statements for your firm and have been
asked to project the firm’s funding needs for 2008. You may make the following
assumptions when making your forecast:
Sales are expected to increase by 20 percent over the coming year -- they will
increase to $12,000,000.
Operating costs are expected to decrease to 58 percent of sales.
The interest rate on long-term debt will remain at 10 percent for 2008, but the
interest rate on short-term debt, such as notes payable, will go up to 12 percent.
The tax rate, currently 35 percent, is expected to increase to 40 percent in 2008.
The firm expects to maintain its dividend payout rate at 50 percent.
All current assets will increase proportionately with sales.