Forecast Zieber’s 2017 income statement and balance sheets. Use the following assumptions:
(1) Sales grow by 6%.
(2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, and inventories to sales will be the same in 2016 as in 2017.
(3) Zieber will not issue any new stock or new long-term bonds.
(4) The interest rate is 11% for long-term debt, and the interest expense on long-term debt is based on the average balance during the year.
(5) No interest is earned on cash.
(6) Regular dividends grow at an 8% rate.
(7) The tax rate is 25%.
Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by drawing on a line of credit with an interest rate of 12%. Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit. If surplus funds are available, pay a special dividend.
a. What are the forecasted levels of the line of credit and special dividends? Create a column showing the ratios for the current year; then create a new column showing the ratios used in the forecast. Also, create a preliminary forecast that doesn’t include any new line of credit or special dividends. Identify the financing deficit or surplus in this preliminary forecast and then add a new column that shows the final forecast that includes any new line of credit or special dividend.
b. Now assume that the growth in sales is only 3%. What are the forecasted levels of the line of credit and special dividends?