The table given below summarizes the 2022 income statement and end-year balance sheet of Drake's Bowling Alleys. Drake's financial manager forecasts a 10% increase in sales and costs in 2023. The ratio of sales to average assets is expected to remain at 0.40. Interest is forecasted at 5% of debt at the start of the year. Sales Costs Interest Pretax profit Tax Net income Income Statement $ in thousands $ 2,500 1,875 100 (40% of average assets) (75% of sales) (5% of debt at start of year)b 525 210 (40% of pretax profit) $ 315 aAssets at the end of 2021 were $6,000,000. bDebt at the end of 2021 was $2,000,000. Balance Sheet $ in thousands $ 6,500 Debt Equity Net assets Total $ 6,500 Total $ 2,000 4,500 $ 6,500 a. What is the implied level of assets at the end of 2023? Note: Enter your answer in dollars not in thousands. b. If the company pays out 50% of net income as dividends, how much cash will Drake need to raise in the capital markets in 2023? Assumes debt remains constant. Note: Do not round intermediate calculations. Enter your answer in dollars not in thousands. c. If Drake is unwilling to make an equity issue, what will be the debt ratio at the end of 2023? Note: Enter your answer as a percent rounded to nearest whole number. a. Ending assets b. External financing need c. Debt ratio %
The table given below summarizes the 2022 income statement and end-year balance sheet of Drake's Bowling Alleys. Drake's financial manager forecasts a 10% increase in sales and costs in 2023. The ratio of sales to average assets is expected to remain at 0.40. Interest is forecasted at 5% of debt at the start of the year. Sales Costs Interest Pretax profit Tax Net income Income Statement $ in thousands $ 2,500 1,875 100 (40% of average assets) (75% of sales) (5% of debt at start of year)b 525 210 (40% of pretax profit) $ 315 aAssets at the end of 2021 were $6,000,000. bDebt at the end of 2021 was $2,000,000. Balance Sheet $ in thousands $ 6,500 Debt Equity Net assets Total $ 6,500 Total $ 2,000 4,500 $ 6,500 a. What is the implied level of assets at the end of 2023? Note: Enter your answer in dollars not in thousands. b. If the company pays out 50% of net income as dividends, how much cash will Drake need to raise in the capital markets in 2023? Assumes debt remains constant. Note: Do not round intermediate calculations. Enter your answer in dollars not in thousands. c. If Drake is unwilling to make an equity issue, what will be the debt ratio at the end of 2023? Note: Enter your answer as a percent rounded to nearest whole number. a. Ending assets b. External financing need c. Debt ratio %
Chapter4: Financial Planning And Forecasting
Section: Chapter Questions
Problem 7P
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Transcribed Image Text:The table given below summarizes the 2022 income statement and end-year balance sheet of Drake's Bowling Alleys. Drake's
financial manager forecasts a 10% increase in sales and costs in 2023. The ratio of sales to average assets is expected to remain at
0.40. Interest is forecasted at 5% of debt at the start of the year.
Sales
Costs
Interest
Pretax profit
Tax
Net income
Income Statement
$ in thousands
$ 2,500
1,875
100
(40% of average assets)
(75% of sales)
(5% of debt at start of year)b
525
210
(40% of pretax profit)
$ 315
aAssets at the end of 2021 were $6,000,000.
bDebt at the end of 2021 was $2,000,000.
Balance Sheet
$ in thousands
$ 6,500 Debt
Equity
Net assets
Total
$ 6,500 Total
$ 2,000
4,500
$ 6,500
a. What is the implied level of assets at the end of 2023?
Note: Enter your answer in dollars not in thousands.
b. If the company pays out 50% of net income as dividends, how much cash will Drake need to raise in the capital markets in 2023?
Assumes debt remains constant.
Note: Do not round intermediate calculations. Enter your answer in dollars not in thousands.
c. If Drake is unwilling to make an equity issue, what will be the debt ratio at the end of 2023?
Note: Enter your answer as a percent rounded to nearest whole number.
a. Ending assets
b. External financing need
c. Debt ratio
%
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