4. Now complete the tables to develop pro forma financial statements for 1993 and 1994. For these calculations, assume that the bank is willing to maintain the present credit lines and to Case: 35 Financial Analysis and Forecasting. grant an additional $6,375,000 of short-term credit on January 1, 1993. In the analysis, take account of the amounts of inventory and accounts receivable that would be carried if inventory utilization (based on the cost of goods sold) and days sales outstanding were set at industry-average levels. Also, assume in your forecast that all of Mark Xs plans and predictions concerning sales and expenses materialize, and that the firm pays no cash dividends during the forecast period. Finally, in your calculations use the cash and marketable securities account as the residual balancing figure.

TABLE 1 Historical and Pro Forma Balance Sheets for Years Ended December 31(in Thousands of Dollars) Proforma 1990 1991 1992 1993 1994 Assets: Cash and marketablesecurities $ 5,149 $ 4,004 $ 3,906 X X Accounts receivable 17,098 18,462 29,357 X X Inventory 18,934 33,029 46,659 X X Current assets $41,181 $55,495 $79,922 X X Land, buildings, plant, and equipment $17,761 $20,100 $22,874 $29,249 30,126 Accumulated depreciation (2,996) (4,654) (6,694) (9,117) (10,940) Net fixed assets $14,765 $15,446 $16,180 $20,132 $19,186 Total assets $55,946 $70,941 $96,102 X X Liabilities and Equity: Short-term bank loans $3,188 $ 5,100 $18,233 X X Accounts payable 6,764 10,506 19,998 15,995 16,795 Accruals 3,443 5,100 7,331 9,301 11,626 Current liabilities $13,395 $20,706 $45,562 X X Long-term bank loans $ 6,375 $ 9,563 $ 9,563 $ 9,563 $ 9,563 Mortgage 2,869 2,601 2,340 2,104 1,894 Long-term debt $ 9,244 $12,164 $11,903 $11,667 $11,457 Total liabilities $22,639 $32,870 $57,465 X X Common stock $23,269 $23,269 $23,269 $23,269 $23,269 Retained earnings 10,038 14,802 15,368 X X Total equity $33,307 $38,071 $38,637 X X Total liabilities and equity $55,946 $70,941 $96,102 X X Notes: a. 3,500,000 shares of common stock were outstanding throughout the period 1990 through 1992. b. Market price of shares: 1990$17.78; 1991$9.71; 1992$3.67. c. Price/earnings (P/E) ratios: 19906.61; 19915.35; 199217.0. The 1992 P/E ratio is high because of the depressed earnings that year. d. Assume that all changes in interest-bearing loans and gross fixed assets occur at the start of the relevant years. e. The mortgage loan is secured by a first-mortgage bond on land and buildings.

Case: 35 Financial Analysis and Forecasting TABLE 2 Historical and Pro Forma Income Statements for Years Ended December 31 (Thousands of Dollars) Pro Forma 1990 1991 1992 1993 1994 Net sales $170,998 $184,658 $195,732 X X Cost of goods sold 187,684 151,761 166,837 X X Gross profit $ 33,314 $ 32,897 $ 28,895 $37,678 $49,520 Administration and selling expenses $ 12,790 $ 15,345 $ 16,881 $17,224 X Depreciation 1,594 1,658 2,040 2,423 1,823 Miscellaneous expenses 2,027 3,557 5,725 3,768 X Total operating expenses $ 16,411 $ 20,560 $ 24,646 X X EBIT $ 16,903 $ 12,337 $ 4,249 $14,263 X Interest on short-term loans $ 319 $ 561 $ 1,823 $ 2,953 $ 2,953 Interest on long-term loans 638 956 956 X 956 Interest on mortgage 258 234 211 X 170 Total interest $ 1,215 $ 1,751 $ 2,990 $ 4,098 $ 4,079 Before-tax earnings $ 15,688 $ 10,586 $ 1,259 X $21,953 Taxes 6,275 4,234 504 4,066 8,781 Net income $ 9,413 $ 6,352 $ 755 X X Dividends on stock 2,353 1,588 89 $ 0 X Additions to retained earnings $ 7,060 $ 4,764 $ 567 X X

Notes: a. Earnings per share (EPS): 1990$2.69; 1991$1.81; 1992$0.22. b. Interest rates on borrowed funds: Short-term loan: 199010%; 199111%; 199210%. Long-term loan: 10% for each year. Mortgage: 9% for each year. c. For purposes of this case, assume that expenses other than depreciation and interest are totally variable with sales. Case: 35 Financial Analysis and Forecasting