This is a comprehensive problem that provides a review of the material covered in the course to date,
Southface Sportswear Corporation
Balance Sheet - December 31, 2012
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Assets
|
|
Liabilities and
Stockholder's Equity
|
|
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Cash
|
$ 70,000
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Accounts Payable
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$ 3,080,000
|
|
Marketable Securities
|
112,000
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Accrued Expenses
|
210,000
|
|
Accounts Receivable
|
4,000,000
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Notes Payable (Due 02/15/13)
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560,000
|
|
Inventory
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1,400,000
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Bonds (10%)
|
3,300,000
|
|
Gross Plant and Equipment
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8,400,000
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Common Stock (2,380,000
Shares, par value $1.00)
|
2,380,000
|
|
Accumulated Depreciation
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2,800,000
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Retained Earnings
|
1,652,000
|
|
Total Assets
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$11,182,000
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Total Liabilities and
Stockholder's Equity
|
$ 11,182,000
|
Southface Sportswear Corporation
Income Statement - for the Period January 1 - December 31, 2012
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Sales (All credit sales)
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$9,800,000
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Fixed Costs1
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2,940,000
|
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Variable Costs (0.60)
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5,880,000
|
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Earnings Before Interest and Taxes
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980,000
|
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Less: Interest
|
350,000
|
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Earnings Before Taxes
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$ 630,000
|
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Less: Taxes @ 36%
|
226,800
|
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Earnings After Taxes
|
403,200
|
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Dividends (40% payout)
|
161,280
|
|
Increased Retained Earnings
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$ 241,920
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Fixed costs include both lease expenses of $280,000 and depreciation of $650,000
The table below shows selected ratios for the firms in this industry.
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Profit Margin
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6.10%
|
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Return on Equity
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8.90%
|
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Return on Assets
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6.50%
|
|
Inventory Turnover
|
5.00X
|
|
Receivables Turnover
|
4.90X
|
|
Fixed Asset Turnover
|
2.10X
|
|
Total Asset Turnover
|
1.06X
|
|
Debt to Total Assets
|
28%
|
|
Current Ratio
|
1.50X
|
|
Quick Ratio
|
1.10X
|
|
Times Interest Earned
|
4.25X
|
|
Fixed Charge Coverage
|
3.00X
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Instructions:
b) Compute the overall break-even point and the cash break-even point (in dollars not in units).Then, compute the DOL, DFL and DCL using the simplified formulas provided for you in the chapter and reiterated in the notes.
d) The company is anticipating a 20% increase in sales for 2013 and is trying to figure out if it will need additional external financing to support this increase in sales. Compute the RNF (required new funds) assuming that the company is operating at only about 70% of its current production capacity. As explained in the text, current notes payable and bonds do not "spontaneously" increase with increases in sales and they should not be part of the L/S component in the RNF calculation.
e) Assume now, that Southface were able to bring some of its particularly weak ratios in line with the industry averages (the profit margin and the accounts receivable turnover ratios). What would the RNF be if the profit margin and receivables turnover ratios were the same as those for the industry. What would the accounts receivable balance be? Use these figures in your new RNF calculations and discuss how the change has an impact on the RNF.