Reference no: EM133111935
Kerikeri Plumbing Supplies' Balance Sheet is presented below. The business year ends on December 15. The balance sheet at year end is similar in percent of sales to that of previous years, and will continue to be in the future.
Kerikeri had sales of $200 million in the previous year, and is expecting a 20% increase in sales next year. The business does not run at full capacity and it can be assumed that the increase in sales can be carried out without the expansion of non- current assets. Of liabilities, only current liabilities are sensitive to changes in sales.
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Kerikeri Plumbing Supplies Ltd.
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Balance Sheet, as of Dec 15, 2021
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Assets
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in millions $
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Liabilities and Shareholder's Equity
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in millions $
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Cash
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30
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Accounts payable
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14
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Accounts receivable
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24
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Accrued wages
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17
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Inventory
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40
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Accrued taxes
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7
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Current assets
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94
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Current liabilities
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38
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Non-current assets
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56
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Long-term debt
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28
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Total liabilities
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66
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Common stock
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40
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Retained earnings
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44
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Total shareholders' equity
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85
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Total Assets
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150
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Total Liabilities and Shareholder's Equity
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150
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Assume that the company has a net profit margin of 7% and a dividend payout ratio of 40%.
(a) If the sales grow by 20% next year, determine how much money is needed to finance the growth?
Enter the amount of required external funds. (Provide answer in $ millions using two decimals, e.g. if your answer is $5,271,984 enter 5.27, without $-sign and without the word "million").
(b) Prepare a pro forma balance shegt with any financing adjustment made to long-term debt. Enter amounts in millions, use the same formatting as described in (a).
Enter the pro forma current assets.
Enter the pro forma total assets.
Enter the pro forma total liabilities.
Enter the pro forma retained earnings.
(c) Prepare the following financial ratios for the original balance sheet (year 2021). Fill the blanks below.
Calculate the current ratio of 2021, round to 2 digits
Calculate the return on assets (%) for 2021, round to 2 digits
Calculate the equity multiplier for 2021, round to 2 digits
(d) Based on the above ratios, indicate whether you expect the return on equity (ROE) to be higher or lower than the return on assets (ROA). No need to calculate the ROE. Enter either "higher" or "lower" and provide a rationale for your decision
Fill in : I expect the ROE to be _____ than the ROA (type either the word higher or the word lower).