Chapter 3 Problem 9

Using the spreadsheet information presented next, and the modified equations
determined in question 8 earlier, extend the forecast for R&E Supplies contained in
Table 3.5 through 2019.
a. What is R&E’s projected external financing required in 2019? How does this
number compare to the 2018 projection?
b. Perform a sensitivity analysis on this projection. How does R&E’s projected external
financing required change if the ratio of cost of goods sold to net sales declines from
86.0 percent to 84.0 percent?
Perform a scenario analysis on this projection. How does R&E’s projected external
c. financing required change if a severe recession occurs in 2019? Assume net sales
decline 5 percent, cost of goods sold rises to 88 percent of net sales due to price
cutting, and current assets increase to 35 percent of net sales as management fails to
cut purchases promptly in response to declining sales.

R&E SUPPLIES
Facts and assumptions ($ thousands)
Actual Forecast Forecast
2017 2018 2019
Net sales $20,613
Growth rate in sales 25% 30%
Cost of goods sold/net sales 86% 86%
Gen., sell., and admin. expense/net sales 12% 11%
Long-term debt $760 $660 $560
Current portion long-term debt $100 $100 $100
Interest rate 10% 10%
Tax rate 45% 45%
Dividend/earnings after tax 50% 50%
Current assets/net sales 29% 29%
Net fixed assets $280 $270
Current liabilities/net sales 14.5% 14.4%
Owners' equity $1,730

INCOME STATEMENT ($ thousands)

Forecast Forecast
Year 2018 2019
Net sales $25,766
Cost of goods sold 22,159
Gross profit 3,607
General, selling, and administrative expense 3,092
Interest expense 231
Earnings before tax 285
Tax 128
Earnings after tax 156
Dividends paid 78
Additions to retained earnings 78

BALANCE SHEET (thousands)

Current assets $7,472
Net fixed assets 280
Total assets 7,752

Current liabilities 3,736

Long-term debt 660
Equity 1,808
Total liabilities and owners' equity 6,204

External funding required $1,548

Chapter 3 Problem 9 Suggested Answers
Using the spreadsheet information presented next, and the modified equations
determined in question 8 earlier, extend the forecast for R&E Supplies contained in
Table 3.5 through 2019.
a. What is R&E’s projected external financing required in 2019? How does this a.
number compare to the 2018 projection?
b. Perform a sensitivity analysis on this projection. How does R&E’s projected external b.
financing required change if the ratio of cost of goods sold to net sales declines from
86.0 percent to 84.0 percent?
Perform a scenario analysis on this projection. How does R&E’s projected external
c. financing required change if a severe recession occurs in 2019? Assume net sales c.
decline 5 percent, cost of goods sold rises to 88 percent of net sales due to price
cutting, and current assets increase to 35 percent of net sales as management fails to
cut purchases promptly in response to declining sales.

R&E SUPPLIES
Facts and assumptions ($ thousands)
Actual Forecast Forecast
2017 2018 2019
Net sales $20,613
Growth rate in sales 25% 30%
Cost of goods sold/net sales 86% 86%
Gen., sell., and admin. expense/net sales 12% 11%
Long-term debt $760 $660 $560
Current portion long-term debt $100 $100 $100
Interest rate 10% 10%
Tax rate 45% 45%
Dividend/earnings after tax 50% 50%
Current assets/net sales 29% 29%
Net fixed assets $280 $270
Current liabilities/net sales 14.5% 14.4%
Owners' equity $1,730

INCOME STATEMENT ($ thousands)

Forecast Forecast
Year 2018 2019
Net sales $25,766 $33,496
Cost of goods sold 22,159 28,807
Gross profit 3,607 4,689
General, selling, and administrative expense 3,092 3,685
Interest expense 231 327
Earnings before tax 285 678
Tax 128 305
Earnings after tax 156 373
Dividends paid 78 187
Additions to retained earnings 78 187

BALANCE SHEET (thousands)

Current assets $7,472 $9,714
Net fixed assets 280 270
Total assets 7,752 9,984

Current liabilities 3,736 4,823

Long-term debt 660 560
Equity 1,808 1,995
Total liabilities and owners' equity 6,204 7,378

External funding required $1,548 $2,606

Projected external financing required in 2019 is $2.606 million, over $1 million
more than in 2018. R&E Supplies needs to get off this treadmill as soon as
possible.
External financing required falls to $2.416 million, down 7.3 percent.

External financing required rises to $2.977 million, up 14.2 percent in this

recession scenario.