Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Analysis And Use Of Financial Statements

Authors: Gerald I. White, Ashwinpaul C. Sondhi, Haim D. Fried

3rd Edition

0471375942, 978-0471375944

More Books

Students also viewed these Finance questions