Question 1
Huskers Inc. is told by its bank that Huskers Inc. can at most have $16,000 balance on its bank debt account next year. Given this constraint, calculate the maximum investment in property, plant and equipment that Huskers Inc. can make during 2013. To answer this question, use the following assumptions:
- Annual sales growth will be 10% during the next year.
- Annual COGS will be 73.5% of the annual revenues.
- Depreciation expense will be 10% of gross PP&E.
- Interest rate is 10% and the annual interest expense is computed as 10% of the previous year's interest bearing debt balance (interest bearing debt =
bank debt + long-term debt)
- Company will not pay any dividends during the next year.
- Cash balance will be 20% of the annual revenue.
- Accounts receivable will be 60% of the annual revenue.
- Accounts payable will be 60% of the annual revenue.
- Long-term debt balance will remain at $20,000 during the next two years.
- Company will not issue equity during the next year.
Income Statement
2012 2013
Revenue $50,000 $55,000.00 [2]
COGS (Excludes depreciation expense) $36,750 $40,425.00 [3]
Depreciation expense $5,000 0.1*(50,000+x) [4]
EBIT $8,250 =55,000-40,425-0.1*(50,000+x) [5]
Interest expense
(10% of previous year's interest bearing debt balance) $2,000 2000 [6]
EBT $6,250 =12,575-0.1*(50,000+x)
=7575-0.1x [7]
Taxes (20%) $1,250 =0.2*(7575-0.1x) [8]
Net income $5,000 =0.8*(7575-0.1x)
=6060-0.08x [9]
Dividends 0 0
- Balance Sheet
Assume that the investment in GPPE is represented by x and fill up the rest of the balance sheet. Numbers in the brackets show the sequence in which I
filled the BS. The sum of L&E must be 79,000 +0.9x. Therefore we have:
33,000+16,000+20,000+20,000+16,060-0.08x = 79,000+0.9x
x = $26.591.84
Assets 2011 2012 2013
Cash $8,000 $10,000 $11,000.00 [10]
Accounts receivable $12,000 $30,000 $33,000.00 [11]
Gross PP&E $50,000 $50,000 50,000+x [1]
Less accumulated depreciation $5,000 $10,000 10,000+0.1*(50,000+x) [12]
Net PP&E $45,000 $40,000 =0.9*(50,000+x)-10,000 [13]
Total assets $65,000 $80,000 =11,000+33,000+0.9*(50,000+x)-10,000
=79,000+0.9x [14]
Liabilities and Equity
Accounts payable $20,000 $30,000 33,000 [16]
Bank debt 0 0 16,000 [17]
Long-term debt $20,000 $20,000 20,000 [18]
Common equity $20,000 $20,000 20,000 [19]
Retained earnings $5,000 $10,000 10,000+6060-0.08x
=16060-0.08x [20]
Total L+E $65,000 $80,000 =79,000+0.9x [1
Assume that the investment in GPPE is represented by x and fill up the rest of the balance sheet. Numbers in the brackets show the sequence in which I filled the BS. The sum of L&E must be 79,000 +0.9x. Therefore we have:
33,000+16,000+20,000+20,000+16,060-0.08x = 79,000+0.9x x = $26.591.84