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Baker Electronics

Baker Electronics is a small electronics manufacturing company located in Moline, Illinois. Each November, the CFO begins the financial forecasting process to project the company's needs for new financing in the coming year. The CFO uses the previous year's income statement and projects sales growth, net income, and earnings that can be reinvested in the company. For 2022, the CFO estimates sales will grow 20% and projects net income and addition to retained earnings assuming dividends remain at 2021 levels.

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108 views1 page

Baker Electronics

Baker Electronics is a small electronics manufacturing company located in Moline, Illinois. Each November, the CFO begins the financial forecasting process to project the company's needs for new financing in the coming year. The CFO uses the previous year's income statement and projects sales growth, net income, and earnings that can be reinvested in the company. For 2022, the CFO estimates sales will grow 20% and projects net income and addition to retained earnings assuming dividends remain at 2021 levels.

Uploaded by

leicatapang
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Baker Electronics Financial Planning

In November of each year, the CFO of Baker Electronics begins the financial forecasting process
to determine the firm's projected needs for new financing during the coming year. Baker is a small
electronics manufacturing company located in Moline Illinois, a city best known as the home of the
John Deere Company. The CFO begins the process with the most recent year's income statement,
then projects sales growth for the coming year, then estimates net income, and finally then esti-
mates the additional earnings he can expect to retain and reinvest in the firm. The firm's income
statement for 2021 follows:

Income Statement ($'000) Year ended Dec. 31, 2021


Sales $ 1,500
Cost of goods sold 1,050
Gross profit 450
Operating costs 225
Depreciation expense 50
Net operating profit 175
Interest expense 10
Earnings before taxes 165
Income taxes 58
Net income 107
Dividends 20
Addition to retained earnings 87

The electronics business has been growing rapidly over the past 18 months as the economy
recovers, and the CFO estimates that sales will expand by 20 percent in the next year. Deprecia-
tion expense will equal $50,000 and interest expense is estimated to be $10,000. In addition, he
estimates the following relationships next year between each of the income statement expense
items and sales:
COGS / Sales 70%
Operating expense / Sales 15%
Tax rate 35%

Note that for the coming year both depreciation expense and interest expense are projected
to remain the same as in 2021.

a. Estimate Baker's net income for 2022 and its addition to retained earnings under the assump-
tion that the firm leaves its dividends paid at the 2021 level.

b. Reevaluate Baker's net income and addition to retained earnings where sales grow at 40 percent
over the coming year. This scenario requires the addition of new plant and equipment in the
amount of $100,000, which increases annual depreciation to $58,000 per year, and interest
expense rises to $15,000.

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