From: Principles of Financial Management (14 ed)

Chap 4 P 18 (Please include all steps)

P418 Pro forma balance sheet

Peabody & Peabody has 2015 sales of $10 million. It wishes to analyze expected performance and financing needs for 2017, which is 2 years ahead. Given the following information, respond to parts a and b.

(1) The percents of sales for items that vary directly with sales are as follows: Accounts receivable, 12% Inventory, 18% Accounts payable, 14% Net profit margin, 3% (2) Marketable securities and other current liabilities are expected to remain unchanged.

(3) A minimum cash balance of $480,000 is desired.

(4) A new machine costing $650,000 will be acquired in 2016, and equipment costing $850,000 will be purchased in 2017. Total depreciation in 2016 is forecast as $290,000, and in 2017 $390,000 of depreciation will be taken.

(5) Accruals are expected to rise to $500,000 by the end of 2017.

(6) No sale or retirement of long-term debt is expected.

(7) No sale or repurchase of common stock is expected.

(8) The dividend payout of 50% of net profits is expected to continue.

(9) Sales are expected to be $11 million in 2016 and $12 million in 2017.

(10) The December 31, 2015, balance sheet follows.

Peabody & Peabody Balance Sheet December 31, 2015 ($000)

Assets Liabilities and stockholders equity Cash $ 400 Accounts payable $1,400 Marketable securities 200 Accruals 400 Accounts receivable 1,200 Other current liabilities 80 Inventories 1,800 Total current liabilities $1,880 Total current assets $3,600 Long-term debt 2,000 Net fixed assets 4,000 Total liabilities 3,880 Total assets $7,600 Common equity 3,720 Total liabilities and stockholders equity $7,600

a. Prepare a pro forma balance sheet dated December 31, 2017. b. Discuss the financing changes suggested by the statement prepared in part a.

Thank you!