17-14 EXCESS CAPACITY Krogh Lumber's 2018 financial statements are shown here.Krogh Lumber: Balance Sheet as of December 31, 2018 (Thousands of Dollars)$ 1,800 Accounts payable$ 7,200CashReceivables10,800 Accrued liabilities2,520Inventories12,600 Notes payable3,472Total current assets$25,200 Total current liabilities$13,192Mortgage bonds5,000Net fixed assets21,600 Common stock2,000Retained earnings26,608$46,800 Total liabilities and equity$46,800Total assetsKrogh Lumber: Income Statement for December 31, 2018 (Thousands of Dollars)Sales$36,000Operating costs including depreciation30,783Earnings before interest and taxes$ 5,217Interest1,017Earnings before taxes$ 4,200Taxes (40%)1,680$ 2,520Net income$ 1,512$ 1,008Dividends (60%)Addition to retained earningsa. Assume that the company was operating at full capacity in 2018 with regard to allitems except fixed assets; fixed assets in 2018 were being utilized to only 75% of capac-ity. By what percentage could 2019 sales increase over 2018 sales without the need foran increase in fixed assets?b. Now suppose 2019 sales increase by 25% over 2018 sales. Assume that Krogh can-not scll any fixcd assets. All assets other than fixed assets will grow at the samerate as sales; however, after reviewing industry averages, the firm would like toreduce its operating costs/sales ratio to 82% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and itcurrently has 1 million shares outstanding. The firm plans to raise 35% of its 2019forecasted interest-bearing debt as notes payable, and it will issue bonds for theremainder. The firm forecasts that its before-tax cost of debt (which includes bothshort- and long-term debt) is 11%. Any stock issuances or repurchases will bemade at the firm's current stock price of $40. Develop Krogh's projected financialstatements like those shown in Table 17.2. What are the balances of notes payable,bonds, common stock, and retained earnings? PRO FORMA INCOME STATEMENT At the end of last year, Roberts Inc. reported the follow-ing income statement (in millions of dollars):17-7Sales$3,000Operating costs excluding depreciation2,450ЕВITDA$ 550Depreciation250EBIT$ 300Interest125EBT$ 175Taxes (40%)70Net income$ 105Looking ahead to the following year, the company's CFO has assembled this information:• Year-end sales are expected to be 10% higher than the $3 billion in sales generatedlast year.Year-end operating costs, excluding depreciation, are expected to equal 80% of year-end sales.Depreciation is expected to increase at the same rate as sales.Interest costs are expected to remain unchanged.The tax rate is expected to remain at 40%.On the basis of that information, what will be the forecast for Roberts' year-end net income?17-8LONG-TERM FINANCING NEEDED At year-end 2018, total assets for Arrington Inc. were$1.8 million and accounts payable were $450,000. Sales, which in 2018 were $3.0 million,are expected to increase by 25% in 2019. Total assets and accounts payable are proportionalto sales, and that relationship will be maintained; that is, they will grow at the same rate assales. Arrington typically uses no current liabilities other than accounts payable. Commonstock amounted to $500,000 in 2018, and retained earnings were $475,000. Árrington plansto sell new common stock in the amount of $130,000. The firm's profit margin on sales is5%; 35% of earnings will be retained.a. What were Arrington's total liabilities in 2018?b. How much new long-term debt financing will be needed in 2019?(Hint: AFN – New stock = New long-term debt.)17-9SALES INCREASE Paladin Furnishings generated $4 million in sales during 2018, andits year-end total assets were $3.2 million. Also, at year-end 2018, current liabilities were$500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and$100,000 of accrued liabilities. Looking ahead to 2019, the company estimates that its assetsmust increase by $0.80 for every $1.00 increase in sales. Paladin's profit margin is 3%, andits retention ratio is 50%. How large of a sales increase can the company achieve withouthaving to raise funds externally?

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17-14 EXCESS CAPACITY Krogh Lumber's 2018 financial statements are shown here. Krogh Lumber: Balance Sheet as of December 31, 2018 (Thousands of Dollars) Cash $ 1,800 Accounts payable $ 7,200 Receivables 10,800 Accrued liabilities 2,520 Inventories 12,600 Notes payable 3,472 Total current assets $25,200 Total current liabilities $13,192 Mortgage bonds 5,000 Net fixed assets 21,600 Common stock 2,000 Retained earnings 26,608 $46,800 Total liabilities and equity Total assets $46,800 Krogh Lumber: Income Statement for December 31, 2018 (Thousands of Dollars) Sales $36,000 Operating costs including depreciation 30,783 Earnings before interest and taxes $ 5,217 Interest 1,017 $ 4,200 Earnings before taxes Taxes (40%) 1,680 Net income $ 2,520 Dividends (60%) $ 1,512 Addition to retained earnings $ 1,008 a. Assume that the company was operating at full capacity in 2018 with regard to all items except fixed assets; fixed assets in 2018 were being utilized to only 75% of capac- ity. By what percentage could 2019 sales increase over 2018 sales without the need for an increase in fixed assets? b. Now suppose 2019 sales increase by 25% over 2018 sales. Assume that Krogh can- not sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 82% and increase its total liabilities-to- assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2019 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements like those shown in Table 17.2. What are the balances of notes payable, bonds, common stock, and retained earnings?