Agriculture Reference
In-Depth Information
Plate 11.1
Dairy barn expansion
Careful analysis is required to determine the right type and level of fi nancing for an agribusiness.
This is true for all agribusinesses, but takes on added importance when undergoing an expansion
using borrowed funds. Photo courtesy of the USDA Natural Resources Conservation Service.
and $5,000 for stock dividends, which would leave the fi rm with only $37,000 for debt
servicing:
Net Operating Income
$50,000
Depreciation
25,000
Total Cash Available
$75,000
Interest
8,000
Income Tax
25,000
Dividend
5,000
Total Cash Required
$38,000
Amount Available for Debt Servicing:
$37,000
Doug would also have to consider other possible needs for these funds, such as boosting
working capital, returning capital equities, and increasing stockholder dividends. When
lending institutions look at these debt servicing fi gures, many use the rule that no more than
50 to 60 percent of the total should actually be counted on as available for debt servicing,
because of the possibility of missing budgeted fi gures or emergency situations.
If the additional capital that is to be borrowed will increase revenues and profi ts, thereby
increasing debt servicing potential, then the amount borrowed can be increased accordingly.
Forecasting such new earnings accurately is crucial. Many managers tend to be overly opti-
mistic, especially in the short run. Remember Murphy's Law in this regard: “If anything can
