Financial Planning Problem

The management team at Taylor, Inc. is working on the companys 2019 pro-forma balance sheet and income statement, and wishes to find out the amount of additional external funds it will need in 2019, based on the following assumptions:

1. Sales are expected to double in 2019.

2. The company is operating at full capacity.

3. All operating assets (cash included) and spontaneous liabilities are expected to

   remain at their same proportion of sales as in 2018. Misc. assets (which are non-

   operating assets) will remain unchanged at $7,500.

4. Cost of Goods Sold and Operating Expenses are also expected to remain equal in

   proportion of sales.

5. Management expects Interest rates to fall in 2019 so that interest expenses will

   remain constant as a percentage of sales, even if the level of bank debt increases in 2019. In addition, assume that interest rates are the same for short-term and long-term debt.

6. The companys tax rate is 40% and the firm does not pay dividends.

1. 1) What are the Additional Funds Needed (AFN) for the year 2019, using both the AFN formula and a pro-forma balance sheet using the pct. of sales method? Both methods should give you the same result.

2. 2) Now assume that, in 2019, while doubling its level of sales, the company wishes to improve its Days Payable to a more acceptable level of 60 days. What will then be the level of AFN?

3. 3) In addition to reducing its Days Payable, the firm also wants to bring its Debt/Equity ratio as close as possible to, but not to exceed 2/1, and its current ratio as close as possible to, but not to fall below 2/1. How would this newly calculated level of AFN (from Question 2) be allocated among additional sources of funds, i.e., notes payable (N/P), long-term debt, and/or newly issued common stock?

Assume that additional long-term debt and common stock can only be obtained in multiples of $50,000 (i.e., $50,000, $100,000, $250,000, etc., and not $75,000 or $125,000, etc.) Additional Notes Payable can be obtained in any amount.

4) Prepare your pro-forma Income Statement and Balance Sheet accordingly. For your ratios, assume a 365 day and use the following formulas: = /

()

=

Note: The term Debt includes all forms of liabilities, not just bank debt.

Please find below Taylor, Inc.s financial statements for the past two years:

Taylor, Inc.	2017	2018
Cash	15,000	15,000
Accounts Receivable	180,000	360,000
Inventory	360,000	720,000
Total Current assets	555,000	1,095,000
Net Fixed assets	217,500	367,500
Misc. Long-Term Assets	7,500	7,500
Total Assets	780,000	1,470,000
Notes Payable	135,000	135,000
Accounts Payable	225,000	682,500
Total Current Liabilities	360,000	817,500
Long-Term Debt	150,000	262,500
Total Liabilities	510,000	1,080,000
Net Worth (Com. Eq. + R.E.)	270,000	390,000
Total Liabilities & Net Worth	780,000	1,470,000
Net Sales	2,160,000	4,320,000
COGS	1,440,000	2,880,000
Gross Profit	720,000	1,440,000
Operating Expenses	601,250	1,212,250
EBIT	118,750	227,750
Interest Expense	18,750	27,750
EBT	100,000	200,000
Taxes	40,000	80,000
Net Income	60,000	120,000