Green Caterpillar Garden Supplies Inc. has the following end-of-year balance sheet: Green Caterpillar Garden Supplies Inc. Balance Sheet For the Year Ended on December 31 Assets Liabilities Current Assets: Cash and equivalents Current Liabilities: Accounts payable $150,000 $250,000 Accounts receivable 400,000 Accrued liabilities 150,000 Inventories 100,000 350,000 $900,000 Total Current Assets $500,000 Notes payable Total Current Liabilities Long-Term Bonds Total Debt 1,000,000 Net Fixed Assets: Net plant and equipment (cost minus depreciation) $2,100,000 $1,500,000 Common Equity Common stock 800,000 Retained earnings Total Common Equity Total Liabilities and Equity 700,000 $1,500,000 $3,000,000 Total Assets $3,000,000 The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Green Caterpillar Garden Supplies Inc. generated $350,000 net income on sales of $12,500,000. The firm expects sales to increase by 17% this coming year and also expects to maintain its long-run dividend payout ratio of 35%.
Suppose Green Caterpillar Garden Supplies Inc.’s assets are fully utilized. Use the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support Green Caterpillar Garden Supplies Inc.’s expected sales. (Note: Do not round intermediate calculations.)
i. $561,000
ii. $459,000
iii. $510,000
iv. $535,500
When a firm grows, some liabilities grow spontaneously along with sales. Spontaneous liabilities are a source of capital that the firm will generate internally, so they reduce the need for external capital. How much of the total increase in assets will be supplied by spontaneous liabilities for Green Caterpillar Garden Supplies Inc. this year? (Note: Do not round intermediate calculations.)
i. $61,200
ii. $74,800
iii. $68,000
iv. $71,400
In addition, Green Caterpillar Garden Supplies Inc. is expected to generate net income this year. The firm will pay out some of its earnings as dividends but will retain the rest for future asset investment. Again, the more a firm generates internally from its operations, the less it will have to raise externally from the capital markets. Assume that the firm’s profit margin and dividend payout ratio are expected to remain constant.
Given the preceding information, Green Caterpillar Garden Supplies Inc. is expected to generate $
from operations that will be added to retained earnings. (Note: Do not round intermediate calculations.)
According to the AFN equation and projections for Green Caterpillar Garden Supplies Inc., the firm’s AFN is