Preparing pro forma financial statements (requires Appendix 5.1). Problem 27 presents financial statements for Target Corporation for Year 1 2. Year 1 3, and Year 14, as well as financial statement ratios.

a. Prepare a set of pro forma financial statements for Target Corporation for Year 15 through Year 19 using the following assumptions: Income Statement 1. Sales grew 9.2 percent in Year 13 and 9.5 percent in Year 14. primarily as a result of increases in the number of new stores and increases in sales of stores open more than one year. Although Target Corporation will continue to increase the number of stores, competition will likely constrain increases in same store sales. Thus, assume that sales will grow 9 percent each year between Year 15 and 19.

2. Other revenues, representing interest of outstanding accounts receivable, have been approximately three percent of sales during the last three years. Assume that other revenues will continue at this historical pattern.

3. The cost of goods sold to sales percentage steadily declined from 69.4 percent in Year 12 to 68.0 percent in Year 14. Target's emphasis on trend merchandising and brand name products will likely decrease this percentage somewhat in future years.

Assume that the cost of goods sold to sales percentage will be 67.5 percent for Year 15 to Year 19.

4. The selling and administrative expense percentage has steadily increased from 25.6 percent of sales in Year 12 to 27.5 percent of sales in Year 14. Increased competition will likely increase this percentage somewhat in future years. Assume that the selling and administrative expense to sales percentage will be 28.0 percent for Year 15 to Year 19.

5. Target Corporation has engaged in long-term borrowing to construct new stores. The average interest rate on interest-bearing debt was approximately 5 percent during Year 14.

Assume this interest rate for all borrowing outstanding (long-term debt, and current portion of long-term debt) for Target Corporation for Year 1 5 to Year 1 9. Compute interest expense on the average amount of interest-bearing debt outstanding each year.

6. Target Corporation's average income tax rate as a percentage of income before income taxes has varied around 38 percent during the last three years. Assume an income tax rate of 38 percent of income before income taxes for Year 15 to Year 19.

7. Target Corporation's dividends increased at an average annual rate of 8 percent between Year 12 and Year 14. Assume that dividends will grow 8 percent each year between Year 15 and Year 19.

Balance Sheet 8. Cash will be the amount necessary to equate total assets with total liabilities plus shareholders' equity. 9. Accounts receivable will increase at the growth rate in sales.

10. Inventory will increase at the growth rate in sales.

11. Prepayments relate to ongoing operating costs, such as rent and insurance. Assume that prepayments will grow at the growth rate in sales.

12. Property, plant, and equipment grew 13.7 percent annually during the most recent three years. The construction of new stores will require additional investments in property, plant, and equipment, but not at the growth rate experienced in recent years.

Assume that property, plant, and equipment will grow 10 percent each year between Year 15 and Year 19.

13. Other assets primarily include deposits made on rented facilities. Assume that other assets will grow at the growth rate in property, plant, and equipment.

14. The accounts payable ratio declined from 7.1 in Year 12 to 6.4 during Year 14. Assume that Target Corporation will decrease its accounts payable turnover to 6.0 times per year for Year 15 to Year 19.

15. The notes to Target Corporation's financial statements indicate that current maturities of long-term debt on January 31 of each year are as follows: Year 14. $866 (amount already appears on the January 3 1 . Year 14, balance sheet): Year 15. $857: Year 16,S502:Year 17.

$752: Year 18, $1,323; Year 19. $1,451. ~ 16. Other current liabilities relate to ongoing operating activities and are expected to grow at the growth rate in sales.

17. Target Corporation uses long-term debt to finance acquisitions of property, plant, and equipment. Assume that long-term debt will decrease by the amount of long-term debt reclassified as a current liability each year and then the remaining amount will increase at the growth rate in properly, plant, and equipment and other assets. For example, the January 31, Year 14, balance sheet of Target Corporation shows the current portion of longterm debt to be $866. Target Corporation will repay this amount during Year 15. During Year 15, Target will reclassify $857 from long-term debt to current portion of long-term debt (see item 15 above). This will leave a preliminary balance in long-term debt of $10,358 (= $1 1,215 - $857). Target Corporation will increase this amount of long-term debt by the 10 percent growth rate in property, plant, and equipment and other assets. The projected amount for long-term debt on the January 31, Year 15, balance sheet is $1 1,394 (= $10,358 x 1.1).
18. Other concurrent liabilities include an amount related to retirement benefits and taxes due after more than one year. Assume that other noncurrent liabilities will increase at the growth rate in sales.
19. Assume that common stock and additional paid-in capital will not change. Statement of Cash Flows 20. Assume that depreciation expense will increase at the growth rate in property, plant, and equipment.
21. Assume that changes in other noncurrent assets on the balance sheet are an investing activity.
22. Assume that changes in other noncurrent liabilities on the balance sheet are an operating activity.
23. Assume that the amount for Other Financing Transactions is zero for Year 15 to Year 19.

b. Describe actions that Target might take to deal with the shortage of cash projected in part a.
C. What are the likely reasons for the projected changes in the rate of return on common shareholders' equity?