Cholesterol Dairy Products has plants in five provinces and operates a very large home delivery service. Sales last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of previous years (and this will continue in the future). All assets and current liabilities will vary directly with sales. Assume the firm is already using capital assets at full capacity.
Balance Sheet (in $ millions)
Assets Liabilities and Shareholders' Equity
Cash . . . . . . . . . . . . . . . . . . . . $ 5 Accounts payable . . . . . . . . . $ 7
Accounts receivable . . . . . . . 10 Accrued wages . . . . . . . . . . . 5
Inventory . . . . . . . . . . . . . . . . 25 Accrued taxes . . . . . . . . . . . . 3
Current assets . . . . . . . . . . 40 Current liabilities . . . . . . . . 15
Capital assets . . . . . . . . . . . . 40 Long-term debt . . . . . . . . . . . 20
Common stock . . . . . . . . . . . 25
Retained earnings . . . . . . . . . 20
Total assets . . . . . . . . . . . . . . $ 80
Total liabilities and shareholders' equity . . . . . . . $ 80
The firm has an aftertax profit margin of 5 percent and a dividend payout ratio of 35 percent.
A) If sales grow by 10 percent next year, determine how many dollars of new funds are needed to finance the expansion.
B) Prepare an pro forma balance sheet with any financing adjustment made to long-term debt.
C) Calculate the current ratio and total debt to assets ratio for each year.