Chapter: 12

Problem: 10

Start with the partial model in the file Ch12 P10 Build a Model.xls on the textbook’s Web site, which contains the
2013 financial statements of Zieber Corporation. Forecast Zeiber's 2014 income statement and balance sheets. Use
the following assumptions: (1) Sales grow by 6%. (2) The ratios of expenses to sales, depreciation to fixed assets,
cash to sales, accounts receivable to sales, and inventories to sales will be the same in 2014 as in 2013. (3) Zeiber
will not issue any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt and the
interest expense on long-term debt is based on the average balance during the year . (5) No interest is earned on
cash. (6) Dividends grow at an 8% rate. (6) Calculate the additional funds needed (AFN). If new financing is
required, assume it will be raised by drawing on a line of credit with an interest rate of 12%. Assume that any draw
on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the
new line of credit. If surplus funds are available, pay a special dividend.

a. What are the forecasted levels of notes payable and special dividends?

Key Input Data: Used in the

forecast
Tax rate 40%
Dividend growth rate 8%
Rate on notes payable-term debt, rstd 9%
Rate on long-term debt, rd 11%
Rate on line of credit, rLOC 12%

December 31 Income Statements:

(in thousands of dollars)
Forecasting 2013 2014 2014
2013 basis Ratios Inputs Forecast
Sales $455,150 Growth 6.00% $482,459
Expenses (excluding depr. & amort.) $386,878 % of sales 85.000% 85.00% $410,090
Depreciation and Amortization $14,565 % of fixed assets 8.000% 8.00% $15,439
EBIT $53,708 $56,930
Interest expense on long-term debt $11,880 Interest rate x average debt during year $13,200
Interest expense on line of credit $0 $0
EBT $41,828 $43,730
Taxes (40%) $16,731 $17,491.94
Net Income $25,097 $26,238
Common dividends (regular dividends) $12,554 Growth 8.00% $13,558
Special dividends $0 $0
Addition to retained earnings (DRE) $12,543 $12,680

December 31 Balance Sheets

(in thousands of dollars)

1
 Forecasting 2013 2014 2014
2013 basis Ratios Inputs Without adj. Adj.
Assets:
Cash $18,206 % of sales 4.000% 4.000% $19,298
Accounts Receivable $100,133 % of sales 22.000% 22.000% $106,141
Inventories $45,515 % of sales 10.000% 10.000% $48,246
Total current assets $163,854 $173,685
Fixed assets $182,060 % of sales 40.000% 40.000% $192,984
Total assets $345,914 $366,669

Liabilities and equity

Accounts payable $31,861 % of sales 7.000% 7.000% $33,772
Accruals $27,309 % of sales 6.000% 6.000% $28,948
Line of credit $0 Previous $0 $4,525
Total current liabilities $59,170 $62,720
Long-term debt $120,000 Previous $120,000
Total liabilities $179,170 $182,720
Common stock $60,000 Previous $60,000
Retained Earnings $106,745 Previous + ΔRE $119,424
Total common equity $166,745 $179,424
Total liabilities and equity $345,914 $298,848

Increase in spontaneous liabilities (accounts payable and accruals) $3,550

+ Increase in long-term bonds, preferred stock and common stock $0
+ Net income minus regular common dividends $14,680
Increase in financing $18,230
− Increase in total assets -$20,755
Amount of deficit or surplus financing: -$2,525
If deficit in financing (negative), draw on line of credit $2,525
If surplus in financing (positive), pay special dividend $0

a. What are the forecasted levels of the line of credit and special dividends?

Required ine of credit $5,525 Note: we copied va

Special dividends $0

b. Now assume that the growth in sales is only 3%. What are the forecasted levels of line of credit and special
dividends?

Required ine of credit $0 Note: we copied va

Special dividends $3,561

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11/30/2015

3
 With Adj.

$19,298
$106,141
$48,246
$173,685
$192,984
$366,669

$33,772
$28,948
$4,525
$67,245
$120,000
$187,245
$60,000
$119,424
$179,424
$366,669

: we copied values from G78:G79 when sales growth in G32 = 6%.

: we copied values from G78:G79 when sales growth in G32 = 3%.