EXCESS CAPACITY Krogh Lumber’s 2016 financial statements are shown here.
a. Assume 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 75% of capacity. By
what percentage could 2017 sales increase over 2016 sales without the need for an
increase in fixed assets?
b. Now suppose 2017 sales increase by 25% 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 82% 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 longterm debt) is 11%. Any stock issuances or repurchases will be made at the firm’s
current stock price of $40. Develop Krogh’s projected financial statements like those
shown in Table 16.2. What are the balances of notes payable, bonds, common stock,
and retained earnings?
Extracted text: Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars) Cash $ 1,800 $ 7,200 Accounts payable Accrued liabilities Receivables 10,800 2,520 Inventories 12,600 Notes payable 3,472 $13,192 Total current assets $25,200 Total current liabilities Mortgage bonds 5,000 Net fixed assets 21,600 Common stock 2,000 Retained earnings 26,608 Total assets $46,800 Total liabilities and equity $46,800 Krogh Lumber: Income Statement for December 31, 2016 (Thousands of Dollars) Sales $36,000 Operating costs including depreciation Earnings before interest and taxes 30,783 $ 5,217 Interest 1,017 $ 4,200 1,680 $ 2,520 Earnings before taxes Taxes (40%) Net income $ 1,512 $ 1,008 Dividends (60%) Addition to retained earnings