A spreadsheet containing R&E Supplies’ 2022 pro forma financial forecast, as shown in Table 3.5, is available for download from McGraw-Hill’s Connect or your course instructor (see the Preface for more information). Using the spreadsheet information presented next, and the modified equations determined in Problem 8 earlier, extend the forecast for R&E Supplies contained in Table 3.5 through 2023.

R&E Supplies Assumptions for 2023 ($ thousands)

Growth rate in net sales 30.0% Tax rate 25.0%

Cost of goods sold/net sales 86.0% Dividend/earnings after tax 50.0%

Gen., sell., & admin. Current assets/net sales 29.0%

expenses/net sales 11.0% Net fixed assets $ 270 Long-term debt $560 Current liabilities/net sales 14.4%

Current portion long-term debt $100 Interest rate 10.0%

a. What is R&E’s projected external financing required in 2023? How does this number compare to the 2022 projection?

b. Perform a sensitivity analysis on this projection. How does R&E’s projected external financing required change if the ratio of cost of goods sold to net sales declines from 86.0 percent to 84.0 percent?

c. Perform a scenario analysis on this projection. How does R&E’s projected external financing required change if a severe recession occurs in 2023? Assume net sales decline 5 percent, cost of goods sold rises to 88 percent of net sales due to price cutting, and current assets increase to 35 percent of net sales as management fails to cut purchases promptly in response to declining sales.

The following three problems demonstrate that pro forma forecasts, cash budgets, and cash flow forecasts all yield the same estimated need for external financing—provided you don’t make any mistakes. For Problems 10, 11, and 12, you may ignore the effect of added borrowing on interest expense. LO.1