FINANCIAL FORECASTING Mini-case:

Questions:

Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2011.

a. Estimate Barker's net income for 2012 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2011 level.

b. Reevaluate Barker's net income and addition to retained earnings where sales grow at 40% over the coming year. This scenario requires the addition of new plant and equipment in the amount of 100,000 dollars which increases annual depreciation to 58,000 dollars per year, and interest expense rises to 15,000 dollars.

onth Mini-Case In November of each year, the CFO of Barker Electronics be- percent gins the financial forecasting process to determine the firm's The electronics business has been growing rapidly over the March projected needs for new financing during the coming year. past 18 months as the economy recovers, and the CFO estimates Barker is a small electronics manufacturing company located in that sales will expand by 20 percent in the next year. Deprecia- other Moline, Illinois, a city best known as the home of the John tion expense will equal $50,000 and interest expense is esti- mated to be $10,000. In addition, he estimates the following larch Deere Company. The CFO begins the process with the most re- relationships next year between each of the income statement lance cent year's income statement, then projects sales growth for the expense items and sales: coming year, then estimates net income, and finally then esti- of mates the additional earnings he can expect to retain and rein- COGS/sales 70% vest in the firm. The firm's income statement for 2011 follows: Operating expenses/sales 15% Tax rate 35% zed Income Statement ($000) Year Ended December 31, 2011 Note that for the coming year both depreciation expense and in- with terest expense are projected to remain the same as in 2011. aning Sales $1,500 Cost of goods sold (1.050) a. Estimate Barker's net income for 2012 and its addition to Gross profit $ 450 retained earnings under the assumption that the firm leaves iated Operating costs (225) its dividends paid at the 201 1 level. Depreciation expense (50) b. Reevaluate Barker's net income and addition to retained Net operating profit $ 175 Interest expense (10) earnings where sales grow at 40 percent over the coming Earnings before taxes $ 165 year. This scenario requires the addition of new plant and (58) equipment in the amount of $100,000, which increases an- Taxes Net income $ 107 nual depreciation to $58,000 per year, and interest expense Dividends 20 rises to $15,000. Addition to retained earnings 87 onth ng ent for her