Assignment:
Halifax Brewery, Inc.
2006 Income Statement
($ in thousands)
Net sales $2500
Cost of goods sold 1800
Depreciation 180
Earnings before interest and taxes $520
Interest 20
Taxable Income 500
Taxes(35%) 175
Net income $325
Addition to Retained earnings $195
Halifax Brewery, Inc.
Balance Sheets as of December 31, 2006
($ in thousands)
Assets
Current Assets
Cash $80
Accounts Receivable $100
Inventory $600
Total $780
Fixed Assets
Net plant and equipment $1200
Total Assets $1980
Liabilities and equity
Current liabilities
Account payable $450
Notes payable 90
Total $540
Long-Term debt $500
Stockholder's equity
Common stock $300
Retained earnings $640 Total $940
Total liabilities $1980
Assume costs (except for depreciation and interest which remain constant), assets, and accounts payable maintain a constant ratio to sales.
Q1. If the firm is operating at full capacity, how much external financing is needed if sales are expected to increase by15% next year and the dividend payout ratio increases by 5%?
Q2. Using all of the same assumptions as above, how much external financing would be needed if fixed assets were only at 75% capacity in 2006.
Q3. Again referring to part (a) (full capacity), if the company wants to finance any EFN by using long-term debt and equity such that the current debt/equity ratio remains the same, what would the new amount of debt and equity be?