HAVERLY COMPANY
THIS YEAR
INCOME STATEMENT
($000)
$ %
Revenue $73,820 100.0
COGS 31,743 43.0
Gross Margin $42,077 57.0
Expenses:
Marketing $17,422 23.6
Engineering 7,087 9.6
Fin & Admin 7,603 10.3
Total Expense $32,112 43.5
EBIT $ 9,965 13.5
Interest $ 2,805 3.8
EBT $ 7,160 9.7
Income Tax $ 3,007 4.1
EAT $ 4,153 5.6
HAVERLY COMPANY
THIS YEAR
INCOME STATEMENT
($000)
ASSETS LIABILITIES & EQUITY
Cash $ 8,940 Accounts Payable $ 1,984
Accounts Rec. $12,303 Accruals $ 860
Inventory $ 7,054 Current Liabilities $ 2,844
Current Assets $28,297
Long Term Debt $22,630
Fixed Assets Equity
Gross $65,223 Stock Accounts $18,500
Accum. Deprec. ($23,987) Retained Earn. $25,559
Net $41,236 Total Equity $44,059
Total Assets $69,533 Total L&E $69,533
The following facts are available
1. Payables are almost entirely due to inventory purchases, and can be estimated through COGS, which is approximately 45% purchased material.
2. Currently owned assets will depreciate an additional $1,840,000 next year.
3. There are two balance sheet accruals. The first is for unpaid wages. The current payroll of $32 million is expected to grow by 12% next year. The closing date of the year will be six working days after a payday. The second accrual is an estimate of the cost of purchased items that have arrived in inventory, but for which vendor invoices have not yet been received. This materials accrual is generally about 10% of the payables balance at year end.
4. The combined state and federal income tax rate is 42%.
5. Interest on current and future borrowing will be at a rate of 12%.
PLANNING ASSUMPTIONS
Income Statement Items
1. Revenue will grow by 13% with no change in product mix. However, competitive pressure is expected to force some reductions in pricing.
2. The pressure on prices will result in a 1.5% deterioration in next year's cost ratio.
3. Spending in the marketing department is considered excessive and will be held to 21% of revenue next year.
4. Due to a major development project, expenses in the engineering department will increase by 20%.
5. Finance and administration expenses will increase by 6%.
Assets and Liabilities
6. An enhanced cash management system will reduce cash balances by 10%.
7. The ACP will be reduced by 15 days. (Calculate the current value to arrive at the target.)
8. The inventory turnover ratio (COGS/Inv.) will decrease by .5.
9. Capital spending is expected to be $7 million. The average depreciation life of the assets to be acquired is five years. The firm uses straight-line depreciation, and takes a half-year in the first year.
10. Bills are currently paid in 50 days. Plans are to shorten that to 40 days.
11. A dividend totaling $1.5 million will be paid next year. No new stock will be sold.
Develop next year's financial plan for Haverly based on these assumptions and last year's financial statements. Include a projected income statement, balance sheet and a statement of cash flows.
