E19.2. Pro Forma Analysis and Default Points (Medium) A firm has the following balance sheet and income statement (in millions of dollars): Operating cash Receivables Inventories Plant and equipment Operating bes Long-term debt (8%) Stockholders' equity Revenues Operating expenses Operating income Interest expense Income before tex income taxes Income after tax Balance Sheet S 4 29 138 942 1,113 288 695 983 130 $1,113 Income Statement $908 817 91 55 36 The long-term debt is 8 percent coupon debt maturing in five years. The statutory tax rate is 38 percent. Prepare pro forma financial statements for the next five years under the two following scenarios. Also forecast cash available for debt service and the debt service requirement under both scenarios. The firm pays no dividends.

a. Sales are expected to grow at 4 percent per year, with the current operating profit margin being maintained and with an asset turnover of 1.14.

b. Sales are expected to decline by 4 percent per year and operating profit margins are expected to decline to 2 percent. With some assets inflexible, asset turnovers are expected to decline to 0.98. Does either of these two scenarios forecast default on the debt?