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Consider the Industrial Supply Company example again. Assume that the company plans to maintain its dividend payment at the same level in 2014 as in
Consider the Industrial Supply Company example again. Assume that the company plans to maintain its dividend payment at the same level in 2014 as in 2013. Also assume that all of the additional financing needed is in the short-term notes payable. Work the pro forma analysis for 2014 under each of the following conditions.
Determine the amount of additional financing need
Work out pro forma financial statements (that is, balance sheet, income statement)
Industrial Supply Company example (Table 4.4) | ||||||
Examples with Additional fund needed | ||||||
Forecast in sales change | case a | case b | ||||
change in Sales | S | 3,750.00 | 3,000.00 | |||
change in expense | EXP | 3,750.00 | 2,800.00 | |||
Current (from current number) | ||||||
Asset | A0 | 7,500.00 | 7,500.00 | <-- from current balance sheet | ||
Sales | S0 | 15,000.00 | 15,000.00 | <-- from current income statement | ||
Dividend | D0 | 250.00 | 250.00 | <-- from current income statement | ||
Expense | EXP0 | 14,250.00 | 14,250.00 | <-- from current income statement | ||
Current account payable (CL0) | CL0 | 1,500.00 | 1,500.00 | <-- only account payable A/P is included | ||
Notes Payable (NP0) | NP0 | 1,000.00 | 1,000.00 | <-- current | ||
Equity | E0 | 4,500.00 | 4,500.00 | <-- current | ||
Forecast | ||||||
next year sales | S1 | 18,750.00 | <-- current + forecasted change | |||
next year expense | EXP1 | 18,000.00 | <-- current + forecasted change | |||
next year income = sales - expense = S1 - EXP1 = | EAT1 | 750.00 | <-- current + forecasted change | |||
sales growth rate | S/S0 | 0.25 | <-- growth rate of sales, change in sales / current sales | |||
Dividend (no change) | ||||||
D1 = D0 | D1 | 250.00 | <-- no change, same as current | |||
Additional fund needed | ||||||
Change in Assets | ||||||
A = (A0/S0)(S) | A | 1,875.00 | <-- forecasted asset - current asset | |||
Change in Current liabilities (only A/P is included) | ||||||
CL = (CL0/S0)(S) | CL | 375.00 | <-- only A/P changes propotionally with Sales | |||
Addition to Retained Earnings | ||||||
RE = [EAT1 - D1] | RE | 500.00 | <-- Earnings after tax - Dividend | |||
Additional fund needed | ||||||
AFN1 = [(A0/S0)(S) - (CL0/S0)(S)] - [EAT1 - D1] | AFN1 | 1,000.00 | <-- increase in N/P | |||
Net year | ||||||
Notes payable | ||||||
NP1=NP0 + AFN1 | NP1 | 2,000.00 | <- current + AFN1 | |||
Equity | ||||||
E1 = E0 + RE | E1 | 5,000.00 | <-- current + RE | |||
How the Addition Fund needed (AFN) fit into the Pro Forma financial statement | ||||||
Balance Sheet | Current | case a | case b | |||
Assets | ||||||
Cash | 500.00 | 625.00 | <-- changes proportionally with sales | |||
A/R | 2,000.00 | 2,500.00 | <-- changes proportionally with sales | |||
Inventories | 4,000.00 | 5,000.00 | <-- changes proportionally with sales | |||
Total Current Assets | 6,500.00 | 8,125.00 | <-- changes proportionally with sales | |||
Fixed Assets, net | 1,000.00 | 1,250.00 | <-- changes proportionally with sales | |||
Total Assets | 7,500.00 | 9,375.00 | <-- changes proportionally with sales | |||
Liabilities and Equity | ||||||
A/P | 1,500.00 | 1,875.00 | <-- changes proportionally with sales | |||
N/P | 1,000.00 | 2,000.00 | <-- plug in, total CL - A/P = AFN | |||
Total CL | 2,500.00 | 3,875.00 | <-- total debt - LT debt | |||
LT debt | 500.00 | 500.00 | <-- no change, we only consider change in short-term N/P | |||
Total Debt | 3,000.00 | 4,375.00 | <-- total asset - equity | |||
Stockholder's equity | 4,500.00 | 5,000.00 | <-- beginning equity + additional to retained earnings | |||
Total liabilities and equity | 7,500.00 | 9,375.00 | <-- = total assets | |||
Additional fund need | 1,000.00 | <--increase from NP0 | ||||
Income Statement | ||||||
Sales | 15,000.00 | 18,750.00 | ||||
Expense | 14,250.00 | 18,000.00 | ||||
Earnings after taxes | 750.00 | 750.00 | ||||
Dividend paid | 250.00 | 250.00 | ||||
Retained earnings | 500.00 | 500.00 |
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