required for its operations none of its cash is excess cash U Dunno Corporation

Required for its operations none of its cash is

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required for its operations (none of its cash is ‘excess cash’): U-Dunno Corporation 2012 and 2013 Balance Sheet 15 2012 2013 2012 2013 Cash $260,000 $290,000 Accounts Payable $110,000 $130,000 Accounts Receivable 180,000 240,000 Notes Payable 120,000 140,000 Inventory 250,000 270,000 Total $230,000 $270,000 Total $690,000 $800,000 Long-Term Debt 290,000 328,000 Net Fixed Assets 410,000 450,000 Common Stock 250,000 250,000 Retained Earnings 330,000 402,000 Total Assets $1,100,000 $1,250,000 Total Liab & Equity $1,100,000 $1,250,000 U-Dunno Corporation 2013 Income Statement Sales $1,600,000 Cost of Goods Sold 1,100,000 Depreciation Expense 200,000 Earnings before Interest and Tax $300,000 Interest Expense 60,000 Taxable Income $240,000 Less: Taxes (40%) 96,000 Net Income $144,000
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a. Assume that all assumptions for application of the AFN Equation hold (as discussed in your course notes, i.e. the firm is operating at full capacity, it maintains the same operating relationships, payout ratios, etc.). What is U-Dunno Corporation’s AFN given a desired increase in Sales to $1,800,000 for 2014? b. If Fixed Assets had only been operating at 80% of capacity in 2013, would additional Fixed Assets still be required given desired sales of $1,800,000 for 2014? If not, what would be the resultant AFN required as per the AFN Equation (as covered in your notes)? c. Given that Fixed Assets had only been operating at 80% of capacity in 2013, if desired Sales increased to $2,200,000 for 2014 instead, what would be the increase in Fixed Asset requirement? 16
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a. New Sales, S1 = $1,800,000 Change in Sales = $1,800,000 - $1,600,000 = $200,000 PM = $144,000/$1,600,000 = 0.09 b = ($402,000-$330,000)/$144,000 = 50% AFN = (A*/S0)ΔS – (L*/S0) ΔS – M(S1)(RR) = (1,250,000/1,600,000)*200,000 – (130,000/1,600,000)*200,000 – 0.09*1,800,000*50% = $59,000 17
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b. Capacity Sales = $1,600,000/0.8 = $2,000,000 Since target sales is only $1,800,000, no additional fixed assets required. Projected increase in fixed assets = ($450,000/$1,600,000)*$200,000 = $56,250 New Resultant AFN =$59,000- $56,250 = $2,750 c. Target ratio = $450,000/$2,000,000 = 22.5% We have enough fixed asset for $2,000,000 of sales, therefore need for additional fixed assets for another $200,000 of sales. Increase in Fixed assets = 22.5%*$200,000 = $45,000 18
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