Building Financial Models. The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (that is, assets net of depreciation) by $200,000 per year for the next 5 years and forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10 percent of net fixed assets at the start of the year. Fixed costs are expected to remain at $56,000 and variable costs at 80 percent of revenue. The company’s policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 25 percent of total capital.

a. Produce a set of financial statements for 2001. Assume that net working capital will equal 50 percent of fixed assets.

b. Now assume that the balancing item is debt, and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2001. What is the projected debt ratio for 2001?

Transcribed Image Text:

Revenue INCOME STATEMENT, 2000 (figures in thousands of dollars) $1,800 Fixed costs Variable costs (80% of revenue) Depreciation 56 1,440 80 Interest (8% of beginning-of-year debt) Taxable income 24 200 Taxes (at 40%) 80 Net income $ 120 Dividends $80 Retained earnings $40 BALANCE SHEET, YEAR-END (figures in thousands of dollars) 1999 2000 Assets Net working capital Fixed assets Total assets $ 400 $ 400 800 800 $1,200 $1,200 Liabilities and shareholders' equity Debt $ 300 $ 300 Equity 900 900 Total liabilities and shareholders' equity $1,200 $1,200