The Landis Corporation had 2008 sales of $100 million. The balance sheet items thatvary directly with sales and the profit margin are as follows:Percent-of-sales method?Balance Sheet End of Year (in $ millions)?Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5%Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 15Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Net fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . 40Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 15Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Profit margin after taxes . . . . . . . . . . . . . . . . . . 6%
The dividend payout rate is 50 percent of earnings, and the balance in retained earningsat the end of 2008 was $33 million. Common stock and the companyÂ’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 reducesthe 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 fundsbeing acquired will be in the form of notes payable. Disregard the information inpart b in answering this question (that is, use the original information and part ain constructing your pro forma balance sheet).
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