PART I: Use the following information on Company Y and perform pro-forma financial modeling using a planned expansion me

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PART I:
Use the following information on Company Y and perform pro-forma
financial modeling using a planned expansion method to answers the
following questions. To do this assume that the percentage values
with respect to sales of the 2020 (i) costs except depreciation,
(ii) cash and equivalents, (iii) accounts receivable, (iv)
inventories, and (v) accounts payable will remain fixed at their
respective percentage values in 2019. Assume also that income tax
will remain at 30% of the Pretax Income. Company Y sells a product
for which in 2019 the total market size was of 500,000 units, of
which Company Y owned a share of 20%. Both, the total market size
and Company Y s market share are expected to grow at a 25% yearly
rate for the next five years. The price of the product is $114 in
2019 and is expected to remain at that price for the next
years.
TABLE B.1
Market Analysis
2019
2020
2021
2022
Market Size
500,000
625,000
781,250
976,563
Market Share
20.000%
25.000%
31.250%
39.063%
Production Volume
100,000
Average Sales Price:
114
Sales
In 2019, the outstanding debt of Company Y is $250,000, for
which the company makes yearly interest payments of 8%. The
executives of Company Y are considering making a significant
capital investment in 2020 of $1,000,000 to purchase new machinery.
The company plans to finance this investment with a 30-year loan
that makes yearly interest payments equivalent to 8% of its
principal. The principal is paid when the loan matures. The
following table summarizes the debt and interest payment of Company
Y.
TABLE B.2
Debt and Interest Table
2019
2020
2021
Outstanding Debt
250,000
250,000
1,250,000
New Net Borrowing
1,000,000
Interest on Debt
Currently, Company Y makes yearly expenditures on replacement
capital investment of $25,000. If the company makes the planned
expansion, it has been decided that it will continue making
replacement capital investment of $25,000 until and including 2020;
and starting in 2021 it will perform yearly expenditures on
replacement capital investment of $70,000. The current and the
planned expenditures on replacement of capital investment will be
financed by the company s cash flow. The following table indicates
for 2019 Company Y s values of i. opening book value, ii. capital
investment, iii. depreciation, and iv. closing book value. The
Table also indicates the 2020-2021 forecast values of capital
depreciation if the planned expansion were to occur in 2020.
Because no decision has yet been done about dividends, before
making any balancing adjustments to the Balance Sheet, assume that
these will be $0 in 2020.
TABLE B.3
Fixed Assets & Capital Investment
2019
2020
2021
Opening Book Value
500,000
Capital Investment
25,000
Depreciation
-26,250
-76,188
-75,878
Closing Book Value
498,750
The following table contains Company Y s income statement for
2019.
TABLE B.4
Income Statement:
2019
2020
Sales
11,400,000
Costs except Depr.
-6,840,000
EBITDA
4,560,000
Depreciation
-26,250
EBIT
4,533,750
Interest Expense (net)
-20,000
Pretax Income
4,513,750
Income Tax
-1,354,125
Net Income
3,159,625
The following table contains Company Y s balance sheet for
2019.
TABLE B.5
Balance Sheet - Assets:
2019
2020
Assets
Cash and Equivalents
5,130,000
Accounts Receivable
5,700,000
Inventories
2,280,000
Total Current Assets
13,110,000
Property, Plant and Equipment
498,750
Total Assets
13,608,750
Balance Sheet - Liabilities and Equity:
2019
2020
Liabilities
Accounts Payable
1,140,000
Total Current Liabilities
1,140,000
Debt
250,000
Total Liabilities
1,390,000
Stockholders' Equity
Starting Stockholders' Equity
1,000,000
Net Income
3,159,625
Dividends
8,059,125
Stockholders' Equity
12,218,750
Total Liabilities and Equity
13,608,750
QUESTION 12
What option can the financial managers of Company Y implement in
order to balance Total Assets and Total Liabilities and Equity for
2020?
Increase the debt by the absolute value of the amount indicated
in your calculations of net new financing;
Increase dividends by the absolute value of the amount indicated
in your calculations of net new financing;
Either of a. or b. would work;
Neither of a. or b. would work;
10 points
QUESTION 13
"Before making additional balancing adjustments to the Balance
Sheet, what is the forecasted value of Net Working Capital for
2020? Express the numerical terms of your answer completely. For
example: If your answer is one million dollars, write:
1000000."
10 points
QUESTION 14
"Before making additional balancing adjustments to the Balance
Sheet, what is the forecasted Increase of Net Working Capital for
2020? Express the numerical terms of your answer completely. For
example: If your answer is one million dollars, write:
1000000."
10 points
QUESTION 15
"Before making additional balancing adjustments to the Balance
Sheet, what is the forecasted value of Free Cash Flow for 2020?
Express the numerical terms of your answer completely. For example:
If your answer is one million dollars, write: 1000000."