Below are recent financial statements for Vectra Manufacturing.

Income Statement for Year Just Ended

Sales Revenue $100,000

Cost of Goods Sold 80,000

Gross Profit $ 20,000

Operating Expenses 10,000

Operating Profit $ 10,000

Interest Expense 1,135

Taxable Income $ 8,865

Taxes (35%) 3,546

Net Income $ 5,319

Balance Sheet as of End of Year

Cash $ 6,000 Accounts Payable $10,000

Accounts Rec. 15,000 Accruals 3,700

Inventories 18,000 Line of Credit 8,300

Net fixed assets 51,000 Bonds Payable 18,000

Common Stock 30,000

Retained Earnings 20,000

Total Assets $90,000 Total Financing $90,000

Information and Assumptions

a. A 10 percent decrease in sales is projected for the next year.

b. Cost of Goods Sold, Current Assets, and Current Liabilities are spontaneous and expected to change with sales.

c. 25% of Operating Expenses are fixed, and the rest will vary with sales.

d. The Line of Credit for the next year has been negotiated with a $6,000 limit. The interest rate is 5 percent, unchanged from the previous year.

e. The firms Bonds are scheduled to mature in 6 years. The coupon rate is 4 percent.

f. The firms dividend payout ratio has been 50% for several years.

g. No fixed assets will be bought or sold during the year, but net fixed assets will decrease due to depreciation expense of $7,650 scheduled for the next year.

1. Prepare Pro Forma statements for the next year using the information and assumptions provided.

2. Will excess financing be available, or will additional financing be needed?

3. In planning for next year, what actions should your firm consider based on your result to question #2?