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The Landis Corporation had 2008 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:Percent Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5% Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 15 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Net fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . 40 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 15 Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Profit margin after taxes . . . . . . . . . . . . . . . . . . 6% The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 2008 was $33 million. Common stock and the company’s long-term bonds are constant at $10 million and $5 million, respectively. Notes payable are currently $12 million. a. How much additional external capital will be required for next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.) b. What will happen to external fund requirements if Landis Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these separately. c. Prepare a pro forma balance sheet for 2009 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part b in answering this question (that is, use the original information and part a in constructing your pro forma balance sheet). a. Δ Sales Spontaneous assets Spontaneous liabilities RNF = .15 $100 million = 15 million = 5% + 15% + 25% + 40% = 85% = 15% + 10% = 25% A S L S PS 2 1 D S1 S1 RNF .85 $15 million .25 $15 million .06 $115 million 1 .5 RNF $12.75 million $3.75 million $3.45 million RNF $5.5 million Where: RNF is Required New Funds S is Change in sales A is the Percentage Relationship of Variable (Spontaneous) Assets to Sales S L is the Percentage Relationship of Variable (Spontaneous) Liabilities to S Sales P is the Profit Margin D is the Dividend Payout Ratio b. If Landis reduces the payout ratio, the company will retain more earnings and need less external funds. A slower growth rate means that fewer assets will have to be financed and in this case, less external funds would be needed. A declining profit margin will lower retained earnings and force Landis Corporation to seek more external funds. c. Landis Corporation Balance Sheet - December 31, 2009 ($ millions) Cash $ 5.75 Accounts payable Accounts receivable 17.25 Accruals Inventory 28.75 Notes payable Net capital assets 46.00 Long-term bonds Common stock Retained earnings $97.75 1 2 $17.25 11.50 17.551 5.00 10.00 36.452 $97.75 Original notes payable plus required new funds. This is the plug figure. 2008 retained earnings (beginning of 2009) + PS2 (1 - D)