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# Chapter 3 Problem 15 -- Aquatic Supplies

15.

Below are the 2008 financial statements for Aquatic Supplies Co. Also appearing are managements forecasts for how individual f
future. The company expects sales to grow 12% next year. Aquatic Supplies finances all of its needs with 10-year long-term debt
of the year is added to the cash balance.

a. Prepare a spreadsheet to estimate Aquatic Supplies 's 2009 need for external funding assuming long-term debt and interest expense
b. Modify your spreadsheet forecast in part (a) to capture the interdependence between the loan and interest expense. That is, switch
and include the necessary loan and added interest expense in your forecast.
c. Is the required loan in part (b) equal to the required loan you calculated in part (a)? Why are they different?

d. Perform a sensitivity analysis of Aquatic Supplies Co.s external financing needs as determined in part (b). Assume sales grow at 1
bank loan increase as sales go from 12% to 17%?

e. Perform a scenario analysis on the companys projection as determined in part (b). Assume sales grow 20%, the cost of goods sold
of sales to 3%, and accounts receivable fall from 13% of sales to 10%. What happens to the loan need in this scenario relative to y

f. Return now to the original assumptions and extend your projections in part (b) through 2013. Continue to assume that all external
interest and any excess cash will add to the companys cash balance. What are your projected values for long-term debt and cash a
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
administrative expenses are 50% of sales. What are your projected values for long-term debt and cash balance in 2013?

## Aquatic Supplies Co.

Income Statement (in \$ millions)
2008
Sales
Cost of Goods Sold

582.762
240.828

12%
39%

Gross Profit

341.934
257.507

49%

## Operating Income Before Deprec.

Depreciation,Depletion,&Amortization

84.427
25.221

30%

Operating Profit
Interest Expense

59.206
16.430 initially constant

Pretax Income
Total Income Taxes

42.776
14.971

Net income

Assumptions

35%

27.805

## Balance Sheet (in \$ millions)

ASSETS
Cash & Equivalents
Account Receivable

7.152
70.538

2%
13%

Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets

39.033
9.339
27.076
153.138

5%
no change
6%

## Net Plant, Property & Equipment

Intangibles
Other Assets
TOTAL ASSETS

81.648
9.415
24.642
268.843

15%
no change
5%

36.951
31.206
3.663
71.820

6%
5%
no change

LIABILITIES
Accounts Payable
Accrued Expenses
Other Current Liabilities
Total Current Liabilities

## Long Term Debt

Accrued wages
Total Liabilities

## 157.720 initially constant

21.418
3%
250.958

EQUITY
Common Stock
Capital Surplus
Retained Earnings
Less: Treasury Stock

1.702
55.513
118.729
158.059

TOTAL EQUITY
TOTAL LIABILITIES & EQUITY

17.885
\$

268.843

no change
no change
no dividends paid so all income is retained
no change

o. Also appearing are managements forecasts for how individual financial statement items will vary in the
uatic Supplies finances all of its needs with 10-year long-term debt at 10% interest, while excess cash at the end

d for external funding assuming long-term debt and interest expense remain at their 2008 levels.

dependence between the loan and interest expense. That is, switch your spreadsheet to "manual calculation"

## lculated in part (a)? Why are they different?

l financing needs as determined in part (b). Assume sales grow at 17% instead of 12%. How much does the

ermined in part (b). Assume sales grow 20%, the cost of goods sold is 38% of sales, inventory falls from 5%
o 10%. What happens to the loan need in this scenario relative to your answer in part (b)?

ions in part (b) through 2013. Continue to assume that all external funding needs will be met with debt at 10%
ance. What are your projected values for long-term debt and cash and equivalents in 2013?

. Assume growth in sales is 10%, the cost of goods sold is 41% of sales, and selling, general and
cted values for long-term debt and cash balance in 2013?

lies Co.

n \$ millions)
Assumptions
growth in sales
percentage of sales

percentage of sales

## percentage of net PP&E

initially constant

\$ millions)

## minimum cash balance as % of sales

percentage of sales

percentage of sales
percentage of sales

percentage of sales
percentage of sales

percentage of sales
percentage of sales

nitially constant
percentage of sales

4/13/2012

## Chapter 3 Problem 15 Solutions

Calculations appear below on this worksheet and on following sheets.
a. Aquatic Supplies Company will need an additional \$27.209 million in debt to finance its activities for 2009.
b. When the interdependency between long-term debt and interest expense is included, interest expense increases from \$16.430 million to \$18.636 million
and the need for new financing rises from \$27.209 million to \$28.643 million (\$186.363 - \$157.720), or \$1,434,000. (Note it is necessary to use manual
c. The increase in the loan need calculated in part (a) was \$27.209 million. The comparable number in part (b) was \$28.643 million. They differ because
the loan need in part (b) includes the interdependence between the loan and interest expense. Note that although interest expense rises \$2,206,000 in part
(b), the tax-deductibility of interest results in an increased loan need of only \$1,434,000 [= \$2,206,000*(1 - 0.35)].
d. Comparing Long-term debt in parts (b) and (d) below, the loan need rises \$8.453 million (\$194.816 - \$186.363) as sales rise to 17%.
e. Under this scenario the loan need falls \$28.733 million from \$186.363 million to \$157.630 million.
f. As shown on the following worksheet, cash and equivalents in 2013 equal \$20.541 million and long-term debt equals \$184.462 million.
g. In this scenario, the indicated worksheet reveals that cash and equivalents will be \$18.771 million and long-term debt will be \$256.300 million, a
substantial increase over the base case debt observed in part (f).

4/13/2012

## Calculations for solutions to parts a, b,d, and e.

Aquatic Supplies Co.
Income Statement (in \$ millions)

2008
Sales
Cost of Goods Sold

(b) Pro-Forma
2009 including
(e) Scenario
inter(d) Sensitivity
analysis
dependencies analysis 2009
2009

582.762
240.828

12%
39%

652.693
254.550

652.693
254.550

681.832
265.914

699.314
265.739

Gross Profit

341.934
257.507

49%

398.143
319.820

398.143
319.820

415.917
334.097

433.575
342.664

## Operating Income Before Deprec.

Depreciation, Depletion, & Amortization

84.427
25.221

30%

78.323
29.371

78.323
29.371

81.820
30.682

90.911
31.469

Operating Profit
Interest Expense

59.206
16.430

initially constant

48.952
16.430

48.952
18.636

51.137
19.482

59.442
15.763

Pretax Income
Total Income Taxes

42.776
14.971

35%

32.522
11.383

30.316
10.611

31.656
11.080

43.679
15.288

Net income

Assumptions

(a) Pro-Forma
2009 ignoring
interdependencies

27.805

21.139

19.705

20.576

28.391

4/13/2012

## Balance Sheet (in \$ millions)

ASSETS
Cash & Equivalents
Account Receivable
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets
Net Plant, Property & Equipment
Intangibles
Other Assets
TOTAL ASSETS
LIABILITIES
Accounts Payable
Accrued Expenses
Other Current Liabilities
Total Current Liabilities

## Long Term Debt

Accrued wages
Total Liabilities
EQUITY
Common Stock
Capital Surplus

13.054
84.850
32.635
9.339
39.162
179.039

81.648
9.415
24.642
268.843

15%
no change
5%

36.951
31.206
3.663
71.820

6%
5%
no change

39.162
32.635
3.663
75.459

39.162
32.635
3.663
75.459

40.910
34.092
3.663
78.664

41.959
34.966
3.663
80.588

157.720
21.418
250.958

initially constant
3%

157.720
19.581
252.760

186.363
19.581
281.403

194.816
20.455
293.935

157.630
20.979
259.197

1.702
55.513

1.702
55.513

1.702
55.513

1.702
55.513

139.868
158.059

138.434
158.059

139.305
158.059

147.120
158.059

97.904
9.415
32.635
318.993

no change
no change
no dividends paid so all
118.729
income is retained
158.059
no change

TOTAL EQUITY

## Need for external financing

2%
13%
5%
no change
6%

1.702
55.513

Retained Earnings
Less: Treasury Stock

## TOTAL LIABILITIES & EQUITY

7.152
70.538
39.033
9.339
27.076
153.138

13.054
84.850
32.635
9.339
39.162
179.039

97.904
9.415
32.635
318.993 \$

13.637
88.638
34.092
9.339
40.910
186.615

13.986
69.931
20.979
9.339
41.959
156.195

102.275
9.415
34.092
332.397

104.897
9.415
34.966
305.473

17.885

39.024

37.590

38.461

46.276

268.843

291.784

318.993

332.397

305.473

27.209

Solution to part f.
Aquatic Supplies Co.
Income Statement (in \$ millions)
Pro Forma Forecasts 2009 - 2013
2010
2011
2012

2009

2013

2008

Assumptions

\$ 582.762
240.828

12%
39%

652.693
254.550

731.017
285.096

818.739
319.308

916.987
357.625

1,027.026
400.540

Gross Profit

341.934
257.507

49%

398.143
319.820

445.920
358.198

499.431
401.182

559.362
449.324

626.486
503.243

## Operating Income Before Deprec.

Depreciation, Depletion, & Amortization

84.427
25.221

30%

78.323
29.371

87.722
32.896

98.249
36.843

110.038
41.264

123.243
46.216

Operating Profit
Interest Expense

59.206
16.430

initially constant

48.952
18.636

54.826
18.801

61.405
18.841

68.774
18.733

77.027
18.446

Pretax Income
Total Income Taxes

42.776
14.971

35%

30.316
10.611

36.025
12.609

42.564
14.897

50.041
17.514

58.581
20.503

Sales
Cost of Goods Sold

Net income

27.805

19.705

23.416

27.667

32.527

38.078

## Balance Sheet (in \$ millions)

ASSETS
Cash & Equivalents
Account Receivable
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets
Net Plant, Property & Equipment
Intangibles
Other Assets
TOTAL ASSETS
LIABILITIES
Accounts Payable
Accrued Expenses
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Accrued wages
Total Liabilities
EQUITY
Common Stock
Capital Surplus

Retained Earnings
Less: Treasury Stock
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY

7.152
70.538
39.033
9.339
27.076
153.138

2%
13%
5%
no change
6%

13.054
84.850
32.635
9.339
39.162
179.039

14.620
95.032
36.551
9.339
43.861
199.403

16.375
106.436
40.937
9.339
49.124
222.211

18.340
119.208
45.849
9.339
55.019
247.756

20.541
133.513
51.351
9.339
61.622
276.366

81.648
9.415
24.642
\$ 268.843

15%
no change
5%

97.904
9.415
32.635
318.993

109.652
9.415
36.551
355.022

122.811
9.415
40.937
395.374

137.548
9.415
45.849
440.568

154.054
9.415
51.351
491.186

36.951
31.206
3.663
71.820

6%
5%
no change

39.162
32.635
3.663
75.459

43.861
36.551
3.663
84.075

49.124
40.937
3.663
93.724

55.019
45.849
3.663
104.532

61.622
51.351
3.663
116.636

157.720
21.418
250.958

initially constant
3%

186.363
19.581
281.403

188.010
21.930
294.015

188.414
24.562
306.701

187.327
27.510
319.368

184.462
30.811
331.908

1.702
55.513

no change
no change
no dividends paid
so all income is
retained
no change

1.702
55.513

1.702
55.513

1.702
55.513

1.702
55.513

1.702
55.513

138.434
158.059

161.851
158.059

189.517
158.059

222.044
158.059

260.122
158.059

37.590

61.007

88.673

121.200

159.278

440.568

\$ 491.186

118.729
158.059
17.885
\$ 268.843

318.993

355.022

395.374

Solution to part g.
Aquatic Supplies Co.
Income Statement (in \$ millions)
Pro Forma Forecasts 2009 - 2013
2010
2011
2012

2009

2013

2008

Assumptions

\$ 582.762
240.828

10%
41%

641.038
262.826

705.142
289.108

775.656
318.019

853.222
349.821

938.544
384.803

Gross Profit

341.934
257.507

50%

378.213
320.519

416.034
352.571

457.637
387.828

503.401
426.611

553.741
469.272

## Operating Income Before Deprec.

Depreciation, Depletion, & Amortization

84.427
25.221

30%

57.693
28.847

63.463
31.731

69.809
34.905

76.790
38.395

84.469
42.234

Operating Profit
Interest Expense

59.206
16.430

initially constant

28.847
19.635

31.731
20.988

34.905
22.434

38.395
23.979

42.234
25.630

Pretax Income
Total Income Taxes

42.776
14.971

35%

9.212
3.224

10.743
3.760

12.471
4.365

14.416
5.046

16.604
5.812

Sales
Cost of Goods Sold

Net income

\$ 27.805

5.988

6.983

8.106

9.370

10.793

## Balance Sheet (in \$ millions)

ASSETS
Cash & Equivalents
Account Receivable
Inventories
Prepaid Expenses
Other Current Assets
Total Current Assets

7.152
70.538
39.033
9.339
27.076
153.138

2%
13%
5%
no change
6%

12.821
83.335
32.052
9.339
38.462
176.009

14.103
91.668
35.257
9.339
42.309
192.676

15.513
100.835
38.783
9.339
46.539
211.010

17.064
110.919
42.661
9.339
51.193
231.177

18.771
122.011
46.927
9.339
56.313
253.360

## Net Plant, Property & Equipment

Intangibles
Other Assets
TOTAL ASSETS

81.648
9.415
24.642
\$ 268.843

15%
no change
5%

96.156
9.415
32.052
313.632

105.771
9.415
35.257
343.119

116.348
9.415
38.783
375.556

127.983
9.415
42.661
411.236

140.782
9.415
46.927
450.484

LIABILITIES
Accounts Payable
Accrued Expenses
Other Current Liabilities
Total Current Liabilities

\$ 36.951
31.206
3.663
71.820

6%
5%
no change

38.462
32.052
3.663
74.177

42.309
35.257
3.663
81.229

46.539
38.783
3.663
88.985

51.193
42.661
3.663
97.517

56.313
46.927
3.663
106.903

157.720
21.418
250.958

initially constant
3%

196.351
19.231
289.759

209.881
21.154
312.264

224.339
23.270
336.594

239.790
25.597
362.904

256.300
28.156
391.359

1.702
55.513

no change
no change

1.702
55.513

1.702
55.513

1.702
55.513

1.702
55.513

1.702
55.513

124.717
158.059

131.700
158.059

139.806
158.059

149.176
158.059

159.969
158.059

23.873

30.856

38.962

48.332

59.125

## Long Term Debt

Accrued wages
Total Liabilities
EQUITY
Common Stock
Capital Surplus

Retained Earnings
Less: Treasury Stock
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY

no dividends paid
so all income is
118.729
retained
158.059
no change
17.885
\$ 268.843

313.632

343.119

375.556

411.236

450.484