Chapter 18, Question 1- The following is the financial statement of Executive Fruit Company for the year ended December 2014. INCOME STATEMENT, 2014 (Figures in $ Thousands)   Revenue $ 3,500   Cost of goods sold 3,150   EBIT $ 350   Interest 70   Earnings before taxes $ 280   State and federal tax 112   Net income $ 168   Dividends 112   Additions to retained earnings $ 56 BALANCE SHEET (Year-End, 2014) (Figures in $ Thousands)   Assets      Net working capital $ 350      Fixed assets 1,400      Total assets $ 1,750   Liabilities and shareholders' equity      Long-term debt $ 700      Shareholders' equity 1,050      Total liabilities and shareholders' equity $ 1,750 The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015. First stage pro forma statements: PRO FORMA INCOME STATEMENT, 2015 (Figures in $ Thousands)   Revenue $ 3,850   Cost of goods sold 3,465   EBIT $ 385   Interest 70   Earnings before taxes $ 315   State and federal tax 126   Net income $ 189   Dividends 126   Additions to retained earnings $ 63 PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands)   Assets      Net working capital $ 385      Fixed assets 1,540      Total assets $ 1,925   Liabilities and shareholders' equity      Long-term debt $ 700      Shareholders' equity 1,113      Total liabilities and shareholders' equity $ 1,813         Required external financing $ 112 Second stage pro forma balance sheet: PRO FORMA BALANCE SHEET (Year-End, 2015) (Figures in $ Thousands)   Assets      Net working capital $ 385      Fixed assets 1,540      Total assets $ 1,925   Liabilities and shareholders' equity      Long-term debt $ 812      Shareholders' equity 1,113      Total liabilities and shareholders' equity $ 1,925 How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.) Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ . The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):   Long-term debt $     Shareholders' equity   Total $   Chapter 18, Question 2- Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.60; profit margin = 6%; payout ratio = 30%; equity/assets = .50. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)   Sustainable growth rate %     Internal growth rat ...

1. Chapter 18, Question 1- The following is the financial statement
of Executive Fruit Company for the year ended December 2014.
INCOME STATEMENT, 2014
(Figures in $ Thousands)
Revenue
$
3,500
Cost of goods sold
3,150
EBIT
$
350
Interest
70
Earnings before taxes
$
280
State and federal tax

2. 112
Net income
$
168
Dividends
112
Additions to retained earnings
$
56
BALANCE SHEET (Year-End, 2014)
(Figures in $ Thousands)
Assets

3. Net working capital
$
350
Fixed assets
1,400
Total assets
$
1,750
Liabilities and shareholders' equity
Long-term debt
$
700
Shareholders' equity
1,050

4. Total liabilities and shareholders' equity
$
1,750
The following are the first stage and second stage pro forma
financial statements of Executive Fruit Company for the year
ended December 2015.
First stage pro forma statements:
PRO FORMA INCOME STATEMENT, 2015
(Figures in $ Thousands)
Revenue
$
3,850
Cost of goods sold
3,465
EBIT

5. $
385
Interest
70
Earnings before taxes
$
315
State and federal tax
126
Net income
$
189
Dividends
126
Additions to retained earnings

6. $
63
PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital
$
385
Fixed assets
1,540
Total assets
$
1,925

7. Liabilities and shareholders' equity
Long-term debt
$
700
Shareholders' equity
1,113
Total liabilities and shareholders' equity
$
1,813
Required external financing
$
112

8. Second stage pro forma balance sheet:
PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital
$
385
Fixed assets
1,540
Total assets
$
1,925
Liabilities and shareholders' equity

9. Long-term debt
$
812
Shareholders' equity
1,113
Total liabilities and shareholders' equity
$
1,925
How would Executive Fruit’s financial model change if the
dividend payout ratio were cut to 1/3? Use the revised model to
generate a new financial plan for 2015 assuming that debt is the
balancing item. What would be the required external financing?
(Do not round intermediate calculations.)
Dividends fall by $ . Therefore, the requirement for external
financing falls from $ to $ . On the other hand, shareholders'

10. equity will be increased by $ .
The right-hand side of the balance sheet becomes (Do not round
intermediate calculations. Enter your answers in thousands.):
Long-term debt
$
Shareholders' equity
Total
$
Chapter 18, Question 2- Find the sustainable and internal
growth rates for a firm with the following ratios: asset turnover
= 1.60; profit margin = 6%; payout ratio = 30%; equity/assets =
.50. (Do not round intermediate calculations. Enter your
answers as a percent rounded to 2 decimal places.)
Sustainable growth rate
%
Internal growth rate
%
Chapter 18, Question 3- Executive Fruit’s financial manager
believes that sales in 2015 could rise by as much as 20% or by
as little as 5%. Assets and costs change in proportion to sales,
debt remains constant, and no new equity financing occurs.

11. a.
Recalculate the first-stage pro forma financial statements under
these two growth assumptions and calculate the required
external financing (All figures are in thousands). (Enter your
answers in thousands.)
Base Case
20% Growth
5% Growth
INCOME STATEMENT
Revenue
$
3,000
$
$
Cost of goods sold
2,700

12. EBIT
$
300
$
$
Interest
60
Earnings before taxes
$
240
$
$
State and federal tax
96

13. Net income
$
144
$
$
Dividends
96
Retained earnings
$
48
$

14. $
BALANCE SHEET
Assets
Net working capital
$
300

15. $
$
Fixed assets
1,200
Total assets
$
1,500
$
$

16. Liabilities and shareholders' equity
Long-term debt
$
600
$
$
Shareholders' equity
900
Total liabilities and shareholders' equity
$
1,500
$
$

17. Required external financing
$
$
b.
Assume any required external funds will be raised by issuing
long-term debt and that any surplus funds will be used to retire
such debt. Prepare the completed (second-stage) pro forma
balance sheet. (Enter your answers in thousands.)
BALANCE SHEET
Base Case
20% Growth
5% Growth
Assets

18. Net working capital
$
300
$
$
Fixed assets
1,200
Total assets
$
1,500
$
$

19. Liabilities and shareholders' equity
Long-term debt
$
600
$
$
Shareholders' equity
900
Total liabilities and shareholders' equity
$
1,500

20. $
$
Chapter 18, Question 2- Plank’s Plants had net income of
$16,000 on sales of $60,000 last year. The firm paid a dividend
of $1,600. Total assets were $900,000, of which $450,000 was
financed by debt.
a.
What is the firm’s sustainable growth rate? (Do not round
intermediate calculations. Enter your answer as a percent
rounded to 1 decimal place.)
Sustainable growth rate
%
b.
If the firm grows at its sustainable growth rate, how much debt
will be issued next year? (Do not round intermediate
calculations.)
New debt
$
c.
What would be the maximum possible growth rate if the firm
did not issue any debt next year? (Do not round intermediate

21. calculations. Enter your answer as a percent rounded to 2
decimal places.)
Maximum growth rate
%
Chapter 18, Question 5- An all-equity-financed firm plans to
grow at an annual rate of at least 12%. Its return on equity is
20%. What is the maximum possible dividend payout rate the
firm can maintain without resorting to additional equity issues?
(Do not round intermediate calculations. Enter your answer as a
percent rounded to 1 decimal place.)
Maximum dividend payout ratio
%
Chapter 18, Question 6- The 2015 financial statements for
Growth Industries are presented below:
INCOME STATEMENT, 2015
Sales
$
280,000
Costs
190,000
EBIT
$
90,000

22. Interest expense
18,000
Taxable income
$
72,000
Taxes (at 35%)
25,200
Net income
$
46,800
Dividends
$ 23,400
Addition to retained earnings
23,400

23. BALANCE SHEET, YEAR-END, 2015
Assets
Liabilities
Current assets
Current liabilities
Cash
$
4,000
Accounts payable
$
11,000
Accounts receivable
9,000
Total current liabilities
$
11,000
Inventories

24. 37,000
Long-term debt
180,000
Total current assets
$
50,000
Stockholders’ equity
Net plant and equipment
220,000
Common stock plus additional paid-in capital
15,000
Retained earnings
64,000
Total assets

25. $
270,000
Total liabilities and stockholders’ equity
$
270,000
Sales and costs in 2016 are projected to be 40% higher than in
2015. Both current assets and accounts payable are projected to
rise in proportion to sales. The fixed assets of Growth
Industries are operating at only 70% of capacity. Interest
expense in 2016 will equal 10% of long-term debt outstanding
at the start of the year. The firm will maintain a dividend payout
ratio of .50.
What is the required external financing over the next year?
Even if sales increase by 40%, the firm still has more than
enough fixed assets to meet production. Only working capital
will increase. Net working capital of the firm in 2015 was $.
The increase in net working capital will be $, which is less than
the increase in the retained earnings. Thus required external
financing is $. A negative external financing value indicates the
firm will generate more cash than it needs to finance the
projected growth. This extra cash can be used to reduce debt,

26. repurchase shares, increase cash reserves, or fund future
growth. This extra cash was primarily due to the firm's excess
production capacity.
Module 3 - EMC - Quality NotesQuality ManagEment
EMC has not had a quality manager or quality department. One
has just been hired to develop a Quality Department.
The process operators have taken quality seriously on their own.
They make sure that the tools and work stations are setup
correctly. They also check the quality of parts periodically as
they are produced. But they do not follow any specific quality
methods or techniques. This approach to quality is the same in
all of the various production departments.
The majority of the production quality issues seems to be
scrapping bad plastic inserts during the assembly process. A lot
of 10 cu. ft. tubs accumulate in Plasti-Brack assembly. But no
one seems to be concerned since these parts are very low cost
and the plastic scrap is re-processed. Plastic scrap goes to a re-
grind operation, where it is ground up into fine pieces. It is then
added to the virgin raw material in a 1 to 9 ratio in the Plastic
Injection Molding Department.
Overall Excellent Manufacturing does not have many big issues
from customer complaints. There are occasional returns of
various products, mostly because of plating and finishing
problems. In terms of Plasti-Brack products, complaints are
about the plastic insert falling out and about sharp edges on the
brackets. Last year there were 56 complaints . They seem to be
on the rise as there are 49 complaints this year during the first
four months.
OPM 500 REPORT TEMPLATE FOR CASE ASSIGNMENTS
TO:
FROM:
SUBJECT:

27. REVIEW OF THE CURRENT SITUATION
[This section discusses the reason for the report – why your
boss assigned you this project. It also provides discussion and
description of the current situation. What is the problem, what
are the data and information about the state of affairs, the
situation, etc. in the Plasti-Brack processes and areas of
concern.]
GOALS AND OBJECTIVES
[This section provides the goals and objectives that you want to
accomplish for this project. Goals are the more general and
qualitative items you want to achieve, and objectives are more
specific and quantitative.]
ACTIONS/PLANS
[What do you propose to do to accomplish the goals? These
should be specific and detailed and focused on the areas of
concern in the Plasti-Brack processes and areas of concern. A
plan should include some sequence of actions, steps, etc., and if
possible, who should do them. What are the costs involved in
doing these actions?]
EXPLANATION/JUSTIFICATION
[Explain how the plan will accomplish the goals and objectives.
Clearly identify the connection between the plan, the various
actions and the various goals and objectives. What are the
benefits of achieving the goals, and do these benefits justify the
costs of doing them?]
Module 2 - EMC - Inventory NotesInventory Management
NOTES ON INVENTORIES AND MATERIAL MOVEMENT
EMC does not account for inventories on an individual product
line basis. But data is available for the Construction Hardware
Product Group - see below. Plasti-Brack is about 85% of this
group, so using this info would be representative of the
inventories for Plasti-Bracks.
Plastic Injection Molding process: Plastic resin is moved to the
molding machines where it is dumped into feeding hoppers for

28. each machine. As the hopper empties, additional resin is
dumped in.
The plastic parts come out of the molding machines and are
trimmed where they are collected in 10 cu. ft. tubs. These tubs
are moved to the Plasti-Brack assembly area.
Metal Bracket Process: The plain brackets are stamped out by
the progressive dies in the Plasti-Brack press machine group.
They are also collected in 10 cu. ft. tubs and then moved to the
Plasti-Brack assembly area.
Assembly Process: In the assembly process, the operator will do
a quick visual check of the plastic insert and the plain bracket
before assembly. Bad parts are discarded into tubs. The plastic
is recycled via a regrind process. The steel parts cannot be used
again and sold for scrap with the rest of the scrap metal.
Bulk Pack Process: The assembled Plasti-Brack items are
collected in 10 cu. ft. tubs and are eventually moved to the Bulk
Pack area. Once they are packed, they move into the Finished
Goods Warehouse where they wait to be picked and packed in
large shipping containers to the customers.
Construction Hardware Inventories
Beginning
Ending
Inventories
(000s)
(000s)
Raw
$ 61.5
$ 55.0
Purch Parts
$ 44.4
$ 42.0
WIP
$ 116.7
$ 99.0
Fin. Goods

29. $ 72.6
$ 75.0
TOTAL INVEN
$ 295.2
$ 271.0
OPM500 EMC Additional Information
A. EMC—Background Information
B. Product Brochure
C. Plasti-Brack Information
D. Manufacturing Processes
E. Basic Financial Information about EMC
F. Financial Information
G. Organizational Chart
H. Plant Layout
A. Module 1 - EMC - Background Info
The Excellent Manufacturing Company
Corporate information:
· Established: February, 1995, Columbus, Ohio
· President/CEO: Jack Walker (original founder)
· Division of National Building Supply
· Subsidiary of RexMag - an international conglomerate of
diversified products
Size and customer info:
· Gross Sales: Approximately $13,000,000
· Total Employees: Approx. 105
· Customers: National and regional home improvement centers
and building supply outlets
Products: Construction and building items:
· FASTENERS
· screws, bolts, nails
· CONSTRUCTION
· Flanges
· Brackets – Plasti-Brack

30. · CABINET HARDWARE
· Hinges
· Knobs
· Pulls
· DECORATIVE HARDWARE
· Towel Bars
· Towel Rings
· Soap Dishes
· Switch Plates
· Outlet Plates
B. Module 1 - EMC - Product Brochure
Productivity & Process Improvement Products: Construction
and building items:
· FASTENERS
· screws, bolts, nuts, nails
· CONSTRUCTION
· Flanges
· Brackets – Plasti-Brack
· CABINET HARDWARE
· Hinges
· Knobs
· Pulls
· DECORATIVE HARDWARE
· Towel Bars
· Towel Rings
· Robe Hooks
· Switch Plates
· Outlet Plates

31. C. Module 1 - EMC - Plasti-Brack Info
Productivity & Process Improvement The Plasti-Brack Product
Line: combination metal / plastic supports
Description of the products:
· Six products, different angles. F90, F100, F120A, F120B,
F130, F135
· Novel item patented by Excellent
· Unique design includes a simulated wood finish and color in
the plastic insert
· Allows it to be used both for internal and external
construction
· Very popular in deck, fence, and shed construction, as well as
in home construction.
Part number system. Each part, component, or raw material is
numbered for ID purposes. This system uses the format: XnnnA.
X is a prefix that denotes the type of part or material: R: Raw,
S: steel, P: Plastic, F: Finished product, B-F: Bulk Packed
Finishe product.
nnn is the body of the part number and can be three to five
digits
A is the suffix which denotes different variations of the same or
similar parts.
For example, F120A is a finished, assembled part, 120 is the
number for this specific part, the 120 degree Plasti-brack, and A
is the small version (B is the larger version).
SAMPLE DRAWING & SAMPLE PROCESS FLOW CHART
Figure 1 shows a sample drawing of the F90. The P90 is the
plastic insert, the S90 is the steel bracket and the F90 is the
assembly of the P90 and S90. Figure 2 shows the process flow
chart for the B-F90, which is the bulk packed F90.
Plasti-Brack processes and descriptions
Machine group 153 Bracket presses.
· Two 400-ton presses
· machine speed is 40 strokes per minute, or 2400 pieces per
hour

32. · Progressive die process, so that one bracket part is produced
per stroke
· Six progressive dies, one for each part.
· setup (die change over), approx. 3.5 hours
Machine group 251 Plasti-Brack insert Mold
· Four 250-ton plastic injection molding machines
· There are six dies, one for each plastic insert
· Cavities per die
· P90 die 6 cavities
· P100 die 5 cavities
· P120A die 8 cavities
· P120B die 4 cavities
· P130 die 7 cavities
· P135 die 8 cavities
· Machine speeds: Plastic injection molding speed is from 18 -
22 seconds/shot
· see table below for Pieces/hr.
· Setup (die change over), approx. 4 hours
Machine group 403 Plasti-Brack Assembly
· Eight assembly stations – tables for operators
· One operator per station
· The rate for the manual assembly operation is 8 pieces per
minute or 480 pieces per hour
· The assembly process consists of:
1. grasp a plastic insert (P90)
2. visually inspect insert
1. if defective, toss into scrap bin and go to step 1, OR
2. keep for next step
3. grasp a bracket (S90)
4. move the insert to the assembly point
5. push insert into place
6. check assembly
1. if insert will not assemble properly, toss into scrap bin, go to
steps 1, 2, 4, & 5, OR
2. if insert does assemble properly, then
7. drop assembly into 10 cu. ft. Tub at the side of the table.

33. · Operators are trained to also do Hinge Assembly, Towel Bar,
Towel Ring and Soap Dish assembly
Machine group 701 Bulk Packing
· Three operators work together on this line
· Plasti-bracks move here from 403 Plasti-Brack Assembly
· Each Plasti-brack is dumped in bulk into a cardboard box
· Each box holds 100 of one of the items.
· Measuring the number in the box is accomplished by “weigh
counting”
· A lid assembled to the full box
· A label is attached to the box
· The closed container is banded by a banding machine on the
conveyer line
· The completed container is sent to the warehouse
· The speed of this line is 4 containers per minute (400
pieces/min.), or 240 containers/hour (24000 pieces/hr.)
· NOTE: There are other products that are bulk packed besides
Plasti-bracks
· Other construction hardware is Bulk Packed
· Hinges are also “bare” bulk packed for cabinet makers.
Otherwise hinges are bag packed first, then bulk packed to be
sent to home supply stores.
· % of Bulk Pack time: Plasti-Brack, 18%, Other Constr. Hdwe,
36%, and Hinges, 46%
Machine group 251 Plasti-Brack insert Mold Production Rates
MACH. GRP. 251 PIECES PER HOUR
Part number
M101
M102
M103
M104
P135
1309.1
1600.0
1440.0

34. 1440.0
P120A
1309.1
1600.0
1440.0
1440.0
P130
0.0**
1260.0
1145.5
1145.5
P100
818.2
0.0**
900.0
900.0
P90
1080.0
1350.0
1200.0
1200.0
P120B
640.0
800.0
720.0
720.0
** This part does not run on this machine - there are minor
issues with the mold/tool, that makes the fit unacceptable to run
it.
This table shows the average amount of piecies that are
contained/transported in the 10 cu. ft. tubs used for material
handling. The same number of the S brackets are contained as
the F part.
MATERIAL HANDLING DATA:PIECES PER 10 CU. FT. TUB
P135
1937

35. F135
1191
P120A
1581
F120A
1030
P130
1678
F130
1075
P100
1305
F100
891
P90
1369
F90
924
P120B
816
F120B
609
D. Module 1 - EMC - Mfg Processes
Productivity & Process Improvement Manufacturing processes
These processes are shown on the Plant Layout. You should
become familiar with those that are used for the Plasti-brack
Product line.
· 100 Heading
· 101 small headers

36. · 105 large headers
· 150 Blanking & Stamping
· 151 small presses
· 153 Bracket presses
· 157 large presses
· 200 Zinc Die Cast Molding & Trimming
· 201 small zinc molders
· 203 trim, small
· 206 large zinc molders
· 208 trim,large
· 250 Plastic Injection Molding
· 251 Plasti-brack insert molding
· 253 Hinge insert molding
· 255 Soap dish molding
· 300 Plating
· 301 Barrel Plating – nickel
· 303 Barrel Plating – chromium
· 305 Rack Plating
· 330 Brushing
· 331 Straight line brushing
· 333 Circular line brushing
· 360 Lacquer
· 361 Spray lacquer line
· 363 Brush lacquer line
· 390 Painting
· 391 Paint line 1
· 393 Paint line 2
· 395 Paint booth
· 400 Assembly
· 401 Hinge Assembly
· 402 Hinge Assembly - auto
· 403 Plasti-brack Assembly
· 404 Towel Ring Assembly
· 406 Soap Dish Assembly
· 500 Packaging
· 501 Bag Packaging

37. · 503 Bar, Ring, Dish Packaging
· 700 Packing
· 701 Bulk Packing
E. Basic Financial Information about EMC
Module 1 - EMC - Financial Info.
The following is the Income Statement from the year just
completed.
Gross Income
COGS
Gross Margin
PRODUCT LINE
(000s)
(000s)
(000s)
Fasteners
$1,010
7.30%
$646
4.68%
$364
2.64%
Cabinet Hardware
$3,243
23.50%
$1,783
12.91%
$1,460
10.58%

38. Construction Hardware
$4,165
30.20%
$2,038
14.76%
$2,127
15.41%
Decorative Hardware
$5,388
39.00%
$2,586
18.73%
$2,802
20.30%
TOTALS
$13,806
100.00%
$7,053
51.1%
$6,753
48.91%
OPERATING EXPENSES
Marketing and Advertising
$850
6.20%
Commissions, Wages & Salaries

39. $1,750
12.70%
Benefits
$770
5.60%
Office Expenses
$175
1.30%
Depreciation
$734
5.30%
Insurance
$943
6.80%
Fixed Energy & Utility Expenses

40. $268
1.90%
Miscellaneous
$132
1.00%
TOTAL OPERATING EXPENSES
$5,622
40.72%
Net Income Before Taxes
$1,295
9.38%
The following is the Statement of Inventories (from the Balance
Sheet) for the year just ending:
Beginning
Ending
Inventories
(000s)
(000s)
Raw

41. $ 205
$ 167
Purch Parts
$ 148
$ 151
WIP
$ 389
$ 322
Fin. Goods
$ 242
$ 243
TOTAL INVEN
$ 984
$ 883
F. Module 1 - EMC - Org Charts
G. EMC Plant Layout
1