a.

Merck
INCOME STATEMENT	Year 3 Estimate	Year 2	Year 1
Net sales		47,716	40,343
Cost of goods		28,977	22,444
Gross profit		18,739	17,900
Selling general & administrative expense		6,531	6,469
Depreciation & amortization expense		1,464	1,277
Interest expense		342	329
Income before tax		10,403	9,824
Income tax expense		3,121	3,002
Net income		7,282	6,822
Outstanding shares	2,976	2,976	2,968
RATIOS
Sales growth	18.27%	18.27%
Gross Profit Margin	39.27%	39.27%
Selling General & Administrative Exp / Sales	13.69%	13.69%
DEPRECIATION (depn exp / pr yr PPE gross)	8.76%	8.76%
INT (int / pr yr LTD)	4.94%	4.94%
Tax (Inc Tax / Pre-tax inc)	30.00%	30.00%

BALANCE SHEET	Year 3 Estimate	Year 2	Year 1
Cash		3,287	4,255
Receivables		5,215	5,262
Inventories		3,579	3,022
Other		880	1,059
Total current assets		12,961	13,598
Property, plant & equipment		18,956	16,707
Accumulated depreciation		5,853	5,225
Net property & equipment		13,103	11,482
Other assets		17,942	15,075
Total assets		44,007	40,155
Accounts payable & accrued liabilities		5,904	5,391
Short-term debt & cmltd		4,067	3,319
Income taxes		1,573	1,244
Total current liab		11,544	9,954
Deferred income, taxes and other		11,614	11,768
Long term debt		4,799	3,601
Total liabilities		27,957	25,323
Common stock		30	30
Capital surplus		6,907	6,266
Retained earnings		31,500	27,395
OTHER EQUITIES		0	0
Treasury stock		22,387	18,858
Shareholder equity		16,050	14,832
Total liabilities & net worth		44,007	40,155
RATIOS
AR turn	9.15	9.15	7.67
INV turn	8.10	8.10	7.43
AP turn	4.91	4.91	4.16
Tax Pay (Tax pay / tax exp)	50.41%	50.41%	41.45%
FLEV (Assets/Equity)	2.35	2.74	2.71
Div/sh	$1.06	$1.06	$0.98
CAPEX	5,100	4312	3641
CAPEX/Sales	9.04%	9.04%	9.03%

Additional Balance Sheet Assumptions:

Other Current Assets- Unchanged

Other Assets- Unchanged

Deferred Income Taxes & Other- Unchanged

Short Term Debt & CMLTD- Unchanged

Long Term Debt- Unchanged

Required:

1)Prepare the estimated Year 3 projected income statement using the ratios provided.

2)Prepare the estimated Year 3 projected balance sheet using the ratios and assumptions provided. Remember that cash is your residual account to make the balance sheet, balance.

3)Assuming that Merck requires an ending 6.5% cash balance for sales projected in Year 3, does it have a surplus or a deficit of cash relative to the requirement. By how much? If a deficit, suggest how the deficit might be financed. If a surplus, suggest how it might be used.