The CFO of Scamper Industries, Ms. Amy Crawford, is getting ready for a board of director's meeting next week. In the board meeting she is going to propose that the company purchase a new building because of the anticipated growth and expansion of their warehouse needs, sales force and support personnel over the next 5 years. In preparation for the meeting, Ms. Crawford has collected the recent income statements and balance sheets for the past two years, 2008 and 2009, as shown in Table 1.
Net Sales $2,000,000 $2,400,000
Cost of Sales
Direct Labor $500,000 $600,000
Direct Materials $300,000 $360,000
Overhead $600,000 $624,000
Total Cost of Sales $1,400,000 $1,584,000
Gross Margin $600,000 $816,000
Selling Expenses $125,000 $125,000
General and Administrative Expenses $97,500 $97,500
Depreciation $125,000 $125,000
Total Expenses $347,500 $347,500
Net Income $252,500 $468,500
Gross Margin Ratio 30.00% 34.00%
Profit Margin Ratio 12.63% 19.52%
Dividends $50,500 $93,700
Cash balances $70,600 $84,600
A/R $210,000 $240,000
Inventories $239,240 $385,740
Total Current Assets $519,840 $710,340
Gross Plant and Equipment $5,163,000 $5,163,000
Accumulated Depreciation $1,728,000 $1,853,000
Net Plant and Equipment $3,435,000 $3,310,000
Total assets $3,954,840 $4,020,340
Liabilities and Owner's Equity
A/P 144,000 149,200
Accrued expenses 165,300 167,400
Total Curent Liabilities 309,300 316,600
Long-term Debt (Plug figure) 0 0
Common Stock 1,765,540 1,448,940
Retained Earnings 1,880,000 2,254,800
Total Shareholder's Equity 3,645,540 3,703,740
Total Liabilities and Equity 3,954,840 4,020,340
Scamper Industries has been growing at a constant rate of 20% over the past of couple of years because of excellent customer service, and is expected to continue growing at the same rate for the next couple of years. This is due to Scamper Industries excellent service, support, and pricing. The company produces and sells dog kennels nationwide and has become very successful at it. The kennels are sold through different retail outlets throughout the nation, but there is one central warehouse, selling and administration facility that is quickly becoming too small. As indicated by the income statement in Table 1, the past year produced revenues of $2,400,000 and a net income of $468,500. Scamper Industries have been growing rapidly, but so far managing the growth well. The company is profitable, efficient with the use of their assets, reasonably liquid, and using long-term debt effectively. Over the past couple of years, they have been able to reduce debt, manage their cash flows, and build up a very strong business.
According to the plan proposed by Ms. Crawford, Scamper Industries, SI, would purchase a new building at $3,000,000, to accommodate the future expected growth. During the next two years, SI would invest $2,000,000 next year, and $1,000,000, the following year. This new building would meet the company's anticipated housing needs for several years. The additional depreciation expense would be 10% of $2,000,000, next year and 10% of the total cost of $3,000,000, the year after, and for the next 9 years. This depreciation expense would be in addition to the existing depreciation.
The move to the new building is intended to be done with as little disruption to regular business operations as possible and with as little inconvenience to employees and customers as possible. Because of the move, the inventory for next year would be reduced by 20% of the current year inventory, but then go back up to the same inventory amount as the current year in two years. The 20% cutback in inventories would only last next year.
SI intends to borrow the necessary funds to finance the purchase of the building over the next two years. In the past, there has been a very good relationship with the local bank and that will continue. The necessary loan amounts will be taken out in each of the next two years as deemed necessary by the projections. The loan will be paid back starting in three years. Interest will be charged at that time. Interest will not be considered at the present time.
Amy Crawford’s Task
In preparation for the board of director's meeting, Ms. Crawford intends to provide a set of pro forma financial statements, including an income statement and a balance sheet for the next two years. As part of Ms. Crawford's staff, you have been asked to provide these financial statements for the next two years.
The projected sales for the next two years will continue to grow at 20%, each year. For the cost of sales, direct labor has been 25% of sales for the past few years, but because of further training and reassignments of responsibility, the direct labor percentage is expected to decrease by 1% each year for the next two years. This trend is expected to continue with more efficient use of the work force. The direct materials expense percentage is expected to increase by 2% next year because of the reduction in inventory, but decrease by 1% from the 2009 expense percentage the year after because of efficiencies provided by the new building. The overhead expense is projected to be the average percentage for the past two years; it is the same percentage for both projected years. The selling expenses are expected to increase by $50,000 next year because of the inconveniences caused by moving into the new building; the year after the selling expenses should decrease by $15,000 from the 2009 amount because of efficiencies provided by the new building. The general expenses are fixed expenses and will remain constant the next two years. Dividends are historically distributed at 20% of net income.
Cash is projected at 3% of sales, and accounts receivable is projected at 9% of sales. Accounts payable is projected at 7% of sales; and the accrued expenses are projected at 8% of sales. There are no plans to sell any additional shares of stock to finance the new building, so the common stock remains constant. Retained earnings will grow each year by the amount of profit after taxes minus any dividends distributed.
The bank debt projected is the difference between the total assets and total liabilities and owner's equity. This is the amount needed to be financed for this project through a loan with the bank.
1. Based upon the above information, set up a projected income statement and projected balance sheet for the years 2010 and 2011.
2. How much will Scamper Industries have to borrow in 2010?, how much in 2011?, according to the projections.
3. Based upon the projections and ratios, what do you think of this proposed acquisition?
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