Oats ‘R’ Us planning for future growth: debt equity ratio, plant capacity, pro-forma info

See attached file for full problem description

Questions, 3, 5 & 8 Need help with these questions.

“We must plan for the future,” said Vicky. “I think we’ve been
playing it by ear for too long.” Mason immediately called the treasurer,
Jim Moroney. “Jim, I need to know how much additional funding we are
going to need for the next year,” said Mason. “The growth rate of
revenues should be between 25% and 40%. I would really appreciate if
you can have the forecast on my desk by early next week.”

Jim knew that his fishing plans for the weekend had better be put
aside since it was going to be a long and busy weekend for him. He
immediately asked the accounting department to give him the last three
years’ financial statements (see Tables 1 and 2) and got right to work!

Questions:

3. Oats ‘R’ Us has a flexible credit line with the Midway Bank.
If Mason decides to keep the debt-equity ratio constant, up to
what rate of growth in revenue can the firm support? What
assumptions are necessary when calculating this rate of
growth? Are these assumptions realistic in the case of Oats
‘R’ Us? Please explain.

5. After conducting an interview with the production manager,
Jim realizes that Oats ‘R’ Us is operating its plant at 90%

8. Given that Mason prefers not to deviate from the firm’s 2004
debt-equity ratio, what will the firm’s pro-forma income
statement and balance sheet look like under the scenario of
40% growth in revenue for 2005 (ignore feedback effects).

Oats ‘R’ Us
Balance Sheet
For the Year Ended Dec. 31st 2004
2,004 2,003 2,002
Assets
Cash and Cash Equivalents 60,000 97,376 48,000
Accounts Receivable 250,416 175,000 150,000
Inventory 511,500 390,000 335,000
Total Current Assets 821,916 662,376 533,000

Plant & Equipment 560,000 560,000 560,000
Accumulated Depreciation (175,000) (150,000) (125,000)
Net Plant & Equipment 385,000 410,000 435,000
Total Assets 1,206,916 1,072,376 968,000

Liabilities and Owner’s Equity
Accounts Payable 135,000 151,352 128,000
Notes Payable 275,000 275,000 250,000
Other Current Liabilities 43,952 50,000 46,000
Total Current Liabilities 453,952 476,352 424,000

Long-term Debt 275,000 250,000 300,000
Total Liabilities 728,952 726,352 724,000

Owner’s Capital 155,560 155,560 155,560
Retained Earnings 322,404 190,464 88,440
Total Liabilities and Owner’s Equity 1,206,916 1,072,376 968,000

Income Statement
For the Year Ended Dec. 31st 2004 2004 2003 2002

Sales 4,700,000 3,760,000 3,000,000
Cost of Sales 3,877,500 3,045,600 2,400,000
Gross Operating Profit 822,500 714,400 600,000
Administrative Expenses 275,000 250,000 215,000
Fixed Expenses 90,000 90,000 90,000
Depreciation 25,000 25,000 25,000
EBIT 432,500 349,400 270,000
Interest Expense 66,000 66,000 66,000
Earnings Before Taxes 366,500 283,400 204,000
Taxes @40% 146,600 113,360 81,600
Net Income 219,900 170,040 122,400
Retained Earnings 131,940 102,024 73,440
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