Handy Dan, Inc., operates warehouse-style stores, selling a variety of home building products and lawn and garden supplies. Presented below are Handy Dan’s historical financial statements for 2014 and 2015:

Required
Using the following set of assumptions, prepare pro forma financial statements for Handy Dan, Inc. for 2016:
1. Sales are projected to grow by 40 percent.
2. Cash is expected to increase at the same rate as sales.
3. Assume the following ratios to forecast the identified accounts:

1. Depreciation expense is based on a 30-year expected life with no salvage value; any property and equipment acquired during the year is depreciated for only one-half year.
2. Interest expense is based on a six percent short-term cost of debt and eight percent cost of debt; only onehalf year of interest is charged on loans taken out during the year.
3. Effective income tax rate is 33.33 percent.
4. Assume no dividends will be paid in 2016.
5. The mix of short-term loans payable, long-term debt and contributed capital is set to satisfy an existing debt covenant that requires the company to maintain a current ratio of 2.0 (or greater) and a total debt-tototal assets ratio of 80 percent (or less).
Discuss the expected profitability and operating cash flow of Handy Dan in 2016.

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(amounts in millions) Sales... Cost of goods sold. Gross profit... Depreciation expense. Other operating expenses Operating income... Interest expense. Income before taxes. Income tax expense. Net income... HANDY DAN, INC. Statement of Income 2015 $980 727 253 8 217 28 21 7 2 $ 5