Problem -

Excess capacity

Krogh Lumber's 2016 financial statements are shown here.

Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars)Cash$1,800Accounts payable$7,200Receivables10,800Notes payable3,472Inventories12,600Accrued liabilities2,520Total current assets$25,200Total current liabilities$13,192Mortgage bonds5,000Net fixed assets21,600Common stock2,000Retained earnings26,608Total assets$46,800Total liabilities and equity$46,800Krogh Lumber: Income Statement for December 31, 2016 (Thousands of Dollars)Sales$36,000Operating costs including depreciation30,783Earnings before interest and taxes$5,217Interest1,017Earnings before taxes$4,200Taxes (40%)1,680Net income$2,520Dividends (60%)$1,512Addition to retained earnings$1,008Assume that the company was operating at full capacity in 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 61% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.

%

Now suppose 2017 sales increase by 20% over 2016 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 84% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 10%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.

Krogh Lumber Pro Forma Income Statement December 31, 2017 (Thousands of Dollars)20162017Sales$36,000 $ Operating costs (includes depreciation)30,783 $ EBIT$5,217 $ Interest expense1,017 $ EBT$4,200 $ Taxes (40%)1,680 $ Net Income$2,520 $ Dividends$1,512 $ Addition to RE$1,008 $ Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars)20162017Cash$1,800 $ Accounts receivable10,800 $ Inventories12,600 $ Fixed assets21,600 $ Total assets$46,800 $ Payables + accruals$9,720 $ Short-term bank loans3,472 $ Total current liabilities$13,192 $ Long-term bonds5,000 $ Total debt$18,192 $ Common stock2,000 $ Retained earnings26,608 $ Total common equity$28,608 $ Total liab. and equity$46,800 $