Table 29.18 shows the 2010 financial statements for the Executive Cheese Company.

Annual depreciation is 10% of fixed assets at the beginning of the year, plus 10% of new investment. The company plans to invest a further $200,000 per year in fixed assets for the next five years and net working capital is expected to remain a constant proportion of fixed Income Statement Sales $950 Costs 250 Pretax income 700 Taxes (at 28.6%) 200 Net income $500 Balance Sheet, Year-end 2011 2010 2011 2010 Assets $3,000 $2,700 Debt $1,000 $900 Equity 2,000 1,800 Total $3,000 $2,700 Total $3,000 $2,700.

Income Statement Revenue $1,785 Fixed costs 53 Variable costs (80% of revenue) 1,428 Depreciation 80 Interest (at 11.8%) 24 Taxes (at 40%) 80 Net income $ 120 Balance Sheet, Year-end 2010 2009 Assets:
Net working capital $ 400 $ 340 Fixed assets 800 680 Total assets $1,200 $1,020 Liabilities:
Debt $ 240 $ 204 Book equity 960 816 Total liabilities $1,200 $1,020.

Sources and Uses Sources:
Net income $120 Depreciation 80 Borrowing 36 Stock issues 104 Total sources $340 Uses:
Increase in net working capital $ 60 Investment 200 Dividends 80 Total uses $340.

assets. The company forecasts that the ratio of revenues to total assets at the start of each year will remain at 1.75. Fixed costs are expected to remain at $53, and variable costs at 80% of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 20%.

a. Construct a model for Executive Cheese like the one in Tables 29.8–29.10.

b. Use your model to produce a set of financial statements for 2011.AppendixLO1