Simmons Company
These Data Represent a Summary of Your First-Iteration

question 13

Essay

Simmons Company
These data represent a summary of your first-iteration forecast amounts for Year 1.Simmons uses dividends as a flexible financial account.
$\begin{array}{|l|r|}\hline&\text { Year +1 }\\\hline \text { Operating Income } & \$ 58 \\\hline \text { Interest Expense } & 8 \\\hline \text { Income before Tax } & \$ 50 \\\hline \text { Tax Provision (20.0 percent effective tax rate) } & 10 \\\hline \text { Net Income } & \$ 40 \\\hline \text { Total Assets } & \$ 200 \\\hline \text { Accrued Liabilities } & \$ 43 \\\hline \text { Long-Term Debt } & \$ 80 \\\hline \text { Common Stock, at par } & \$ 20 \\\hline \text { Retained Earnings (at the beginning of Year } 1 \text { ) } & \$ 34\\\hline\end{array}$
A.See the information for Simmons Company.
Compute the amount of dividends you can assume that Simmons will pay in order to balance your projected balance sheet.Present the projected balance sheet.
B.See the information for Simmons Company.
Now assume that Simmons pays common shareholders a dividend of $25 in Year +1.Also assume that Simmons uses long-term debt as a flexible financial account,increasing borrowing when it needs capital and paying down debt when it generates excess capital.For simplicity,assume that Simmons pays 10.0 percent interest expense on the ending balance in long-term debt for the year and that interest expense is tax deductible at Simmons' average tax rate of 20.0 percent.
Present the projected income statement and balance sheet for Year +1.(Hint: Because of the circularity between interest expense,net income,and debt,several iterations may be needed to balance the projected balance sheet and to have the projected balance sheet articulate with net income.You may find it helpful to program a spreadsheet to work the iterative computations.)

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Definitions:

Communist Central Planning

A system where the government makes all decisions about the production and allocation of goods and services in an economy.

Personal Gain

The benefit or advantage one receives or aims to receive from an action or investment, often measured in terms of financial or personal satisfaction.

Market System

A system of economics where the choices about investment, production, and distribution rely on the principles of supply and demand, and the pricing of goods and services is established freely in the market.

Business Risk

The potential for losses or less than expected returns stemming from the operational aspects of a business.