Chapter 3 Problem 15

Below are the 2017 financial statements for Aquatic Supplies Co. Also appearing are management’s forecasts
for how individual financial statement items will vary in the future. The company expects sales to grow 12%
next year. Aquatic Supplies finances all of its needs with 10-year long-term debt at 10% interest.
a. Prepare pro forma financial statements for Aquatic Supplies for 2018 assuming that long-term debt and interest
expense remain at their 2017 levels. What is Aquatic's external funding required for 2018?
b. Modify your forecast in part (a) assuming that long-term debt and interest expense increase in order to make up
the external funding required for 2018. (Be sure to enable interative calculation in Excel.) How much
additional long-term debt (compared to 2017) will be required under this assumption?
c. Why are your answers to part (a) and part (b) different?
d. Perform a sensitivity analysis of Aquatic Supplies Co.’s external financing needs as determined in part (b).
Assume sales grow at 17% instead of 12%. How much total long-term debt would be required?
e. Perform a scenario analysis on the company’s projection as determined in part (b). Assume sales grow 20%,
the cost of goods sold is 38% of sales, inventory falls from 5% of sales to 3%, and accounts receivable fall
from 13% of sales to 10%. How much long-term debt is required in this scenario?
f. Return now to the original assumptions (sales growth=12%, COGS=39%, inventory=5%, AR=13%) and
extend your projections in part (b) through 2022. Continue to assume that all external funding needs will be
met with debt at 10% interest. What is your projected value for long-term debt in 2022?
g. Perform a scenario analysis on your 5-year projection in part (f). Assume growth in sales is 10%, the cost of
goods sold is 41% of sales, and selling, general and administrative expenses are 50% of sales. What is your
projected value for long-term debt in 2022?

AQUATIC SUPPLIES CO.

INCOME STATEMENT ($ millions)
2017 Assumptions

Sales $582.762 12%

Cost of Goods Sold 240.828 39%
Gross Profit 341.934
Selling, General, & Administrative Expense 257.507 49%
Operating Income 84.427
Depreciation & Amortization 25.221 30%
Operating Profit 59.206
Interest Expense 16.430 initially constant
Pretax Income 42.776
Total Income Taxes 14.971 35%
Net income $27.805

BALANCE SHEET ($ millions)

ASSETS
Cash & Equivalents $7.152 2%
Account Receivable 70.538 13%
Inventories 39.033 5%
Prepaid Expenses 9.339 no change
Other Current Assets 27.076 6%
Total Current Assets 153.138
Net Property, Plant, & Equipment 81.648 15%
Intangible Assets 9.415 no change
Other Assets 24.642 5%
TOTAL ASSETS $268.843

LIABILITIES
Accounts Payable $36.951 6%
Accrued Expenses 31.206 5%
Other Current Liabilities 3.663 no change
Total Current Liabilities 71.820
Long Term Debt 157.720 initially constant
Accrued Wages 21.418 3%
Total Liabilities 250.958

EQUITY
Common Stock 1.702 no change
Capital Surplus 55.513 no change
Retained Earnings 118.729 no dividends
Less: Treasury Stock 158.059 no change
Total Equity 17.885
TOTAL LIABILITIES & EQUITY $268.843
lso appearing are management’s forecasts
The company expects sales to grow 12%
ng-term debt at 10% interest.
8 assuming that long-term debt and interest
ng required for 2018?
erest expense increase in order to make up
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this assumption?

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m debt would be required?
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this scenario?
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e that all external funding needs will be
-term debt in 2022?
sume growth in sales is 10%, the cost of
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percentage of pretax income

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minimum balance as % of sales

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Chapter 4 Problem 11

a. Use the information below from Tournament Sporting Goods's annual financial
statements
b. Do to calculate
you think Tournamentthe Sporting
actual andGoods
sustainable growth
is having rate forfinancing
a problem each yearitsfrom
growth? Is the increase in dividends a good idea for the company?
TOURNAMENT SPORTING GOODS
FINANCIAL DATA ($ thousands)
2013 2014 2015 2016 2017
Sales 491.62 706.52 792.01 876.52 1,088.46
Net income 43.27 26.31 38.48 44.84 25.76
Total assets 477.06 648.42 664.26 697.16 982.63
Equity 346.32 426.01 465.85 432.91 553.27
Dividends 0.00 0.00 0.80 1.65 2.22
Chapter 4 Problem 12
Problem 15, part f. in Chapter 3 asks you to construct a five-year financial projection for Aquatic Supplies beginn
2018. The five-year projection appears below.
a. Calculate Aquatic Supplies' sustainable and actual growth rates in these years.
b. What do these numbers suggest to you?

AQUATIC SUPPLIES CO.

INCOME STATEMENT ($ millions)
Actual Forecast
2017 2018 2019 2020
Sales 582.762 652.693 731.017 818.739
Cost of Goods Sold 240.828 254.550 285.096 319.308
Gross Profit 341.934 398.143 445.920 499.431
Selling, General, & Administrative Exp. 257.507 319.820 358.198 401.182
Operating Income Before Deprec. 84.427 78.323 87.722 98.249
Depreciation & Amortization 25.221 29.371 32.896 36.843
Operating Profit 59.206 48.952 54.826 61.405
Interest Expense 16.430 18.636 18.801 18.841
Pretax Income 42.776 30.316 36.025 42.564
Total Income Taxes 14.971 10.611 12.609 14.897
Net Income 27.805 19.705 23.416 27.667

BALANCE SHEET ($ millions)

ASSETS
Cash & Equivalents 7.152 13.054 14.620 16.375
Account Receivable 70.538 84.850 95.032 106.436
Inventories 39.033 32.635 36.551 40.937
Prepaid Expenses 9.339 9.339 9.339 9.339
Other Current Assets 27.076 39.162 43.861 49.124
Total Current Assets 153.138 179.039 199.403 222.211
Net Property, Plant, & Equipment 81.648 97.904 109.652 122.811
Intangible Assets 9.415 9.415 9.415 9.415
Other Assets 24.642 32.635 36.551 40.937
TOTAL ASSETS 268.843 318.993 355.022 395.374

LIABILITIES
Accounts Payable 36.951 39.162 43.861 49.124
Accrued Expenses 31.206 32.635 36.551 40.937
Other Current Liabilities 3.663 3.663 3.663 3.663
Total Current Liabilities 71.820 75.459 84.075 93.724
Long Term Debt 157.720 186.363 188.010 188.414
Accrued Wages 21.418 19.581 21.930 24.562
Total Liabilities 250.958 281.403 294.015 306.701
EQUITY
Common Stock 1.702 1.702 1.702 1.702
Capital Surplus 55.513 55.513 55.513 55.513
Retained Earnings 118.729 138.434 161.851 189.517
Less: Treasury Stock 158.059 158.059 158.059 158.059
Total Equity 17.885 37.590 61.007 88.673

TOTAL LIABILITIES & EQUITY 268.843 318.993 355.022 395.374

for Aquatic Supplies beginning in

Forecast
2021 2022
916.987 1,027.026
357.625 400.540
559.362 626.486
449.324 503.243
110.038 123.243
41.264 46.216
68.774 77.027
18.733 18.446
50.041 58.581
17.514 20.503
32.527 38.078

18.340 20.541
119.208 133.513
45.849 51.351
9.339 9.339
55.019 61.622
247.756 276.366
137.548 154.054
9.415 9.415
45.849 51.351
440.568 491.186

55.019 61.622
45.849 51.351
3.663 3.663
104.532 116.636
187.327 184.462
27.510 30.811
319.368 331.908
 1.702 1.702
55.513 55.513
222.044 260.122
158.059 158.059
121.200 159.278

440.568 491.186