Executive Fruit’s financial manager believes that sales in 2000 could rise by as much as 20 percent or by as little as 5 percent.

a. Recalculate the first-stage pro forma financial statements (Table 1.15) under these two assumptions. How does the rate of growth in revenues affect the firm’s need for external funds?

b. Assume any required external funds will be raised by issuing long-term debt and that any surplus funds will be used to retire such debt. Prepare the completed (second-stage) pro forma balance sheet.

Data from in Table 1.15

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TABLE 1.15 First-stage pro forma statements for Executive Fruit Co., 2000 (figures in thousands) Revenue Cost of goods sold EBIT PRO FORMA INCOME STATEMENT Interest Earnings before taxes State and federal tax Net income Dividends Retained earnings Comment $2,200 1,980 10% higher 10% higher 220 10% higher 40 Unchanged 180 EBIT - interest 72 40% of (EBIT-interest) $ 108 EBIT interest - taxes $ 72 2/3 of net income $ 36 Net income - dividends PRO FORMA BALANCE SHEET Assets Net working capital Fixed assets Total assets Liabilities and shareholders' equity $ 220 10% higher 880 10% higher $1,100 10% higher $ 400 Temporarily held fixed Long-term debt Shareholders' equity Total liabilities and shareholders' equity $1,036 Required external financing $ 64 636 Increased by retained earnings Sum of debt plus equity Balancing item or plug ($1,100 $1,036)