(Forecasting financing needs) The current balance sheet Murphy Forklifts, Inc., is as follows:

Murphy Forklifts, Inc.

Balance Sheet, December 31, 2016 ($ millions)

Current assets $10 Accounts payable $ 5 Net fixed assets 15 Notes payable 0 Total $25 Bonds payable 10 Common equity 10 Total $25 Murphy had sales for the year ended December 31, 2016, of $50 million. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus, Murphy generates no funds from its earnings that can be used to expand its operations. (Assume that depreciation expense is equal to the cost of replacing worn-out assets.)

a. If Murphy anticipates sales of $100 million during the coming year, develop a pro forma balance sheet for the firm for December 31, 2017. Assume that current assets are a percentage of sales, net fixed assets remain unchanged, and accounts payable vary as a percentage of sales. Use notes payable as a balancing entry.

b. How much new financing will Murphy need next year?

c. What are the limitations of the percent-of-sales forecasting method? Discuss briefly.