Additional Funds Needed

Garlington Technologies Inc.s 2021 financial statements are shown below.

Garlington Technologies Inc.: Balance Sheet as at December 31, 2021

Cash	$180,000	Accounts payable	$360,000
Receivables	360,000	Notes payable	156,000
Inventories	720,000	Accruals	180,000
Total current assets	1,260,000	Total current liabilities	696,000
Fixed assets	1,440,000	Common stock	1,800,000
		Retained earnings	204,000
Total assets	$2,700,000	Total liabilities and equity	$2,700,000

Garlington Technologies Inc.: Income Statement for December 31, 2021

Sales	$3,600,000
Operating costs	3,279,720
EBIT	320,280
Interest	18,280
EBT	302,000
Taxes (40%)	120,800
Net income	$181,200
Dividends	$108,000

a. Suppose that in 2022 sales increase by 10% over 2021 sales and that 2022 dividends will increase to $112,000. Construct the pro forma financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2021. Use an interest rate of 13%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the AFN will be in the form of notes payable.

	Garlington Technologies Inc. Pro Forma Income Statement December 31, 2022	2022
2021	Forecast Basis	Additions
Sales	$3,600,000	1.10 Sales2121		$
Operating costs	3,279,720	0.911 Sales2222
EBIT	320,280
Interest	18,280	0.13 Debt2121
EBT	302,000
Taxes (40%)	120,800
Net income	$181,200			$
Dividends:	$108,000	Set by management		$
Addition to RE:	$73,200			$

	Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2022	With AFN 2022
2021	Forecast Basis % 2022 Sales	Additions	2022	AFN Effects
Cash	$180,000	0.05		$		$198,000
Receivables	360,000	0.10				396,000
Inventories	720,000	0.20				792,000
Total current assets	1,260,000					1,386,000
Fixed assets	1,440,000	0.40				1,584,000
Total assets	$2,700,000			$		$
Accounts payable	$360,000	0.10		$		$396,000
Notes payable	156,000				+128,783	284,783
Accruals	180,000	0.05				198,000
Total current liabilities	696,000					878,783
Common stock	1,800,000					1,800,000
Retained earnings	204,000		87,217*			291,217
Total liab. and equity	$2,700,000			$		$
					AFN =	$128,783

*See income statement.

b. Below is some additional information on Garlington:

	2021
Current ratio	1.81
Return on equity	9%
Earnings per share	$1.68
Dividends per share	$1
Number of common shares outstanding	108,000
Common share price	$18

I. Calculate the companys 2022 current ratio, ROE, EPS, and DPS based on the expansion and financing as in part a.

Current ratio =

x

Return on equity =

%

Earnings per share = $

Dividends per share = $

II. Because of an agreement with their lender, Garlingtons current ratio cannot drop below 1.7 or it will violate a debt covenant. How much can the company increase its notes payable and still not violate its minimum current ratio?

Increase in notes payable = $

III. Assume that Garlington increases its notes payable to the maximum allowed under its current ratio restriction and issues stock (at the beginning of the year) to raise the remaining funds required. Calculate the companys ROE, EPS, and DPS.

ROE =

%

EPS = $

DPS = $

IV. Recalculate Garlingtons ROE, EPS, and DPS if all the additional financing was obtained through the sale of new common stock.

ROE =

%

EPS = $

DPS = $