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 Year 1 and Year 2:

Required
Using the following set of assumptions, prepare pro forma financial statements for Handy Dan, Inc., for Year 3:
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:

4. 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.
5. Interest expense is based on a six percent short-term cost of debt and eight percent long-term cost of debt;
only one-half year of interest is charged on loans taken out during the year.
6. Assume no dividends were paid in Year 3.
7. Effective income tax rate is 33.33 percent.
8. 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).

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($ 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 Year 2 $980 (727) 253 (8) (217) 28 (21) 7 (2) 5