13 Jun DETERMINE THE EFFECT OF SUCH VARIANCES ON AFN AND THE KEY RATIOS.
Use the model in File C16 to solve this problem.
Stendardi Industries’ financial statements for the past year are shown in the following tables.
Stendardi Industries: Balance Sheet as of December 31 ($ million)
Cash $ 4.0 Accounts payable $ 8.0
Receivables 12.0 Notes payable 5.0
Inventories 16.0 Current liabilities $13.0
Current assets $32.0 Long-term debt 12.0
Net fixed assets 40.0 Common stock 20.0
Retained earnings 27.0
Total assets $72.0 Total liabilities and equity $72.0
Stendardi Industries: Balance Sheet as of December 31 ($ million)
Sales $ 80.0
Operating costs (71.3)
Earnings before interest and taxes $ 8.7
Interest ( 2.0)
Earnings before taxes $ 6.7
Taxes (40%) ( 2.7)
Net income $ 4.0
Dividends (40%) $ 1.60
Addition to retained earnings $ 2.40
Assume that the firm has no excess capacity in fixed assets, the interest rate for short-term debt is 10 percent, the interest rate for long-term debt is 12 percent, and that the projected annual sales growth rate for the next five years is 15 percent.
a. Stendardi plans to finance its additional funds needed with 50 percent short-term debt and 50 percent long-term debt. Using the projected balance sheet method, prepare the firm’s pro forma financial statements for the next five years. Determine the following: (1) the additional funds needed, (2) the current ratio, (3) the debt ratio, (4) the return on equity (ROE) and the return on assets (ROA), (5) profit margin, and (6) the total assets turnover.
b. Sales growth could be five percentage points higher or lower than the projected 15 percent. Determine the effect of such variances on AFN and the key ratios.
c. Perform an analysis to determine the sensitivity of AFN and the forecasted key ratios for Year 5 to changes in the dividend payout ratio as specified in the following, assuming that sales grow at a constant 15 percent. What happens to Stendardi’s AFN if the dividend payout ratio (1) increases from 40 percent to 70 percent or (2) decreases from 40 percent to 20 percent?
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