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Activity 1.3.1

This document provides instructions and details for 4 activity questions: 1. It asks to calculate Austin Grocers' projected 2019 net income and expected growth rate in dividends based on information provided about the company's 2018 income statement and forecasts for 2019. 2. It asks to forecast Jasper Furnishings' year-end inventory level and inventory turnover ratio given information about the company's estimated sales and relationship between inventories and sales. 3. It asks to calculate Arrington Inc.'s total liabilities in 2018 and new long-term debt financing needed in 2019 based on information about the company's 2018 assets/liabilities and projections for 2019 sales. 4. It asks questions about E

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De Nev Oel
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239 views1 page

Activity 1.3.1

This document provides instructions and details for 4 activity questions: 1. It asks to calculate Austin Grocers' projected 2019 net income and expected growth rate in dividends based on information provided about the company's 2018 income statement and forecasts for 2019. 2. It asks to forecast Jasper Furnishings' year-end inventory level and inventory turnover ratio given information about the company's estimated sales and relationship between inventories and sales. 3. It asks to calculate Arrington Inc.'s total liabilities in 2018 and new long-term debt financing needed in 2019 based on information about the company's 2018 assets/liabilities and projections for 2019 sales. 4. It asks questions about E

Uploaded by

De Nev Oel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Activity 1.3.

Direction: Provide what is asked. Show your solution.

1. Austin Grocers recently reported the following 2018 income statement (in millions of dollars):

Sales $ 700
Operating costs including depreciation 500
EBIT $ 200
Interest 40
Earnings before taxes $ 160
Taxes (40%) 64
Net income $ 96

Dividends $ 32
Addition to retained earnings $ 64

For the coming year, the company is forecasting a 25% increase in sales, and it expects that its year-end operating costs,
including depreciation, will equal 70% of sales. Austin’s tax rate, interest expense, and dividend payout ratio are all expected
to remain constant.
a. What is Austin’s projected 2019 net income?
b. What is the expected growth rate in Austin’s dividends?

2. Jasper Furnishings has $300 million in sales. The company expects that its sales will increase 12% this year. Jasper’s CFO
uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of
recent history, the estimated relationship between inventories and sales (in millions of dollars) is as follows:

Inventories = $ 25 + 0.125(Sales)

Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of
the company’s year-end inventory level and its inventory turnover ratio?

3. At year-end 2018, total assets for Arrington Inc. were $1.8 million and accounts payable were $450,000. Sales, which in 2018
were $3.0 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and
that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current
liabilities other than accounts payable. Common stock amounted to $500,000 in 2018, and retained earnings were $475,000.
Arrington plans to sell new common stock in the amount of $130,000. The firm’s profit margin on sales is 5%; 35% of earnings
will be retained.
a. What were Arrington’s total liabilities in 2018?
b. How much new long-term debt financing will be needed in 2019?
(Hint: AFN = New stock = New long-term debt.)

4. Earleton Manufacturing Company has $3 billion in sales and $787,500,000 in fixed assets. Currently, the company’s fixed
assets are operating at 80% of capacity.
a. What level of sales could Earleton have obtained if it had been operating at full capacity?
b. What is Earleton’s target fixed assets/sales ratio?
c. If Earleton’s sales increase 30%, how large of an increase in fixed assets will the company need to meet its target
fixed assets/sales ratio?

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