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Comprehensive Problem Comprehensive Problem 1

This document provides a comprehensive problem involving Mansfield Corporation's external funding requirements. It asks the reader to: 1) Calculate how much additional external capital is needed if sales increase 15% based on percentages of spontaneous assets and liabilities. 2) Discuss how external fund requirements would be affected if Mansfield reduces its payout ratio, grows more slowly, or suffers a profit margin decline. 3) Prepare a pro forma 20X2 balance sheet assuming any new funds are notes payable based on the original information and results of part 1.

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494 views

Comprehensive Problem Comprehensive Problem 1

This document provides a comprehensive problem involving Mansfield Corporation's external funding requirements. It asks the reader to: 1) Calculate how much additional external capital is needed if sales increase 15% based on percentages of spontaneous assets and liabilities. 2) Discuss how external fund requirements would be affected if Mansfield reduces its payout ratio, grows more slowly, or suffers a profit margin decline. 3) Prepare a pro forma 20X2 balance sheet assuming any new funds are notes payable based on the original information and results of part 1.

Uploaded by

marisa
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 4 COMPREHENSIVE PROBLEM

Comprehensive Problem 1.
Mansfield Corporation (external funds requirement) (LO4) Mansfield Corporation had 20X1
sales of $100 million. The balance sheet items that vary directly with sales and the profit margin
are as follows:

Percent
Cash.................................................................. 5%
Accounts receivable................................................... 15
Inventory....................................................................
20
Net fixed assets..........................................................40
Accounts payable....................................................... 15
Accruals......................................................................
10
Profit margin after taxes............................................ 10%

The dividend payout rate is 50 percent of earnings, and the balance in retained
earnings at the end of 20X1 was $33 million. Notes payable are currently $7 million. Long-
term bonds and common stock are constant at $5 million and $10 million, respectively.

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 Mansfield Corporation reduces
the 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 20X2 assuming that any external funds being
acquired will be in the form of notes payable. Disregard the information in part b in
answering this question (that is, use the original information and part a in
constructing your pro forma balance sheet).
CP 4-1. Solution:
Mansfield Corporation
Sales  .15  $100 million =15 million
Spontaneous assets  5%  15%  20%  40%  80%
Spontaneous liabilities  15%  10%  25%

A L
RNF=  S   S  PS2  1  D 
S S
 .8  $15 million   .25  $15 million   .10  $115   1  .5 
 $12 million  $3.75 million  $5.75 million
a. = $2.5 million
b. If Mansfield reduces the payout ratio, the company will retain more
earnings and need less external funds. A slower growth rate means
that fewer assets will have to be financed, and in this case, less
external funds would be needed. A declining profit margin will
lower retained earnings and force Mansfield Corporation to seek
more external funds.
c. Balance Sheet—December 31, 20X2
(Dollars in Millions)
Cash.............................. $ 5.75 Accounts payable......... $ 17.25
Accounts receivable...... 17.25 Accruals........................ 11.50
Inventory....................... 23.00 Notes payable.............. 9.51
Net fixed assets............. 46.00 Long-term bonds......... 5.00
Common stock............. 10.00
_____ Retained earnings........ 38.752
$92.00 $92.00
1
Original notes payable plus required new funds. This is the plug figure.
2
20X2 retained earnings (end of 20X1) + PS2 (1 – D)

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