Marvin industries Inc. operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, teams, and organizations to create, publish, promote, and monetize their digital content. The company is forecasting operations to determine the additional financing that will be needed to support its operations and to assess whether the firm’s anticipated performance is in line with the company’s own general targets and investors’ expectation.
Marvin Industries: balance sheet as of December 31, 2020 (Thousands of dollars)
Cash2,000Accounts Payable7,200Receivables10,800Notes Payable3,400Inventories12,400Accruals 2,620Total current assets25,200Total current liabilities13,220 Long-term debt?Fixed assets21,600Common stock2,000 Retained earnings 26,580Total assets46,800Total liabilities & equity 46,800
Marvin Industries: Income Statement for December 31, 2020 (Thousands of dollars)
Sales36,000Operating costs30,000EBIT5,400Interest720Taxes @ 25%1,170Net income3,510Dividends 60%2,016Addition to retained earnings1,404
Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Marvin has arranged to sell $5,000 of new common stock in 2021 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2021. The company’s net profit margin on sales is 9.75%, and 60% of earnings will be paid out as dividends. Marvin is operating at full capacity, so its assets must grow at the same rate as projected sales.
(HINT: AFN = (A0*/S0)(?S) – (L0*/S0)(?S) – (M)(S1)(1 – payout) – new common stock)
Explain how the following factors affect external capital requirements:payout ratiocapital intensityprofit margin
A small company, Stevens Textile Co. is expanding its operations and needs additional financing to support its expansion projects. The company is planning to change its business registration from a limited liability company to a corporation. As a corporation it will be listed on the stock exchange market and sell shares to the public to raise capital from investors. The business will be managed by professional executives who are not owners of the corporation.
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