I am having major problems with this course. I am not getting it. I have a Pro Forma Analysis to create and I started it but I am stuck and lost. Don't think what I did before is right

FIN 330 Copy-Tek: Proforma Analysis This case has been condensed to a two-year narrative. In actual fact it was a five-year story. The advantage of this digested version is that it greatly reduces the amount of calculations while preserving the essential point of the case. The identity of the business has been changed. Although Copy-Tek had been started only in 1998, by the end of 2008 it seemed well established, profitable, and still growing rapidly. From an initial investment of $700,000 and a second-round financing of just over a million dollars it was able to grow to sales of eight million dollars on assets of five million dollars. A local bank was only too happy to lend it $468,000 that it requested to increase the size of its inventories. In 2008 it paid an extraordinary 60% of its net income in the form of dividends yet still had sufficient retained earnings so that it could appeared to be able to grow rapidly without further external funding. Copy -Tek is in the copy machine business. Although it sells new machines its secret to generating large cash flows is its focus on servicing copy machines under contract. Its reputation, spread mostly through word of mouth among small and mid-sized businesses, is that it is a reliable company that is willing to maintain photo copiers under contract rates that are below the major suppliers of the equipment. The key to their success is their ability to recruit technicians from Eastern European countries like Moldova, Slovakia, Czech, Bulgaria, and Poland. The company arranges for their legal immigration, trains them, and sends them out on repair and servicing calls. These workers tend to be competent, diligent, and are willing to work for lower wages and fewer benefits than natural-born Americans. As the year 2009 unfolds it is clear that the company's original pro-forma projections for the year are no longer valid. This is the year following the worst financial panic since 1929 and all of Copy-Tek's customers are cutting costs as their revenues decline. In fact it is pretty clear that the company will lose money this year and will have to go hat-inhand to the banks before the year is out. Whether they will be able to secure new loans or not is yet to be determined. But the financial officer knows that the sooner he presents potential lenders with a credible plan the more likely the company will be able to secure credit. For that reason there is some urgency to revising the Pro-forma statement for 2009. The accompanying Excel spreadsheet provides the income statement and balance sheet for 2008. Your job is to construct a pro-forma balance sheet for 2009 and 2010 to be submitted to potential lenders. Below is the relevant information. Some of it has already been incorporated into the Copy-Tek Case Excel Spreadsheet. 1. The complete Balance Sheet and Income Statement are available on the Copy-Tek Case Excel Spreadsheets. 2. Sales will fall from $8,000,000 in 2008 to 6,000,000 in 2009. Copy-Tek guesses that many firms that have not renewed their contracts or have postponed purchasing new equipment are continuing to use the existing equipment at almost the same rate as in 2008. Copy machines wear out from usage at a rapid rate and heavily used machines need a constant supply of replacement parts. For that reason Copy-Tek believes that sales will rebound and hit $8,800,000 in 2010 even if the economy as a whole has not yet recovered. 3. The cost of goods sold will remain proportional to sales at a constant rate for both 2009 and 2010. This is consistent with the textbook and lecture. 4. Administrative expenses include the wages for the service repairmen. Rather than attempting to run a cost system on billable hours, the firm considers wages and salaries of its technicians as \"administrative costs.\" These costs will remain the same for 2009 and 2010. That is because the company is reluctant to lay off workers and send them back to their native countries. It is not clear that they could be easily brought back under the new immigration guidelines. Moreover, Copy-Tek believes that they will be needed in 2010 and, given the firm-specific technical knowledge they possess, firing one set of workers and re-training a new set of workers will be costly and inefficient. Administrative expenses will not, however, be increased in 2010. 5. The depreciation charge was never mentioned in either the textbook nor in the lecture. Knowledgeable students know that these are not cash expenses. But in this case it is easy and correct to pretend that they are cash expenses. A depreciation charge artificially reduces income and artificially reduces assets. In the latter case it means less financing is necessary to support total assets. In fact, Copy-Tek will not purchase fixed assets for 2009 or 2010. Fixed assets on the balance sheet will be reduced by the scheduled depreciation charge only. 6. It is correct to hold interest expenses constant in a \"first round\" trial pro-forma balance sheet. But in this case, we know that extensive borrowing will be necessary so an initial estimate of $310,000 for 2009 and $290,000 for 2010 is suggested. 7. If the company fails to make a profit, or if it loses money in 2009 it won't have to pay taxes. If it loses money in 2009 taxes will be $0 for that year. But the tax code in the U.S. provides for a \"tax loss carry forward.\" That means that if the firm can make a profit in 2010 that profit can be offset to the extent of the loss in 2009 for calculating taxes. There are several was to calculate the tax liability in 2010. One way is to combine the loss of 2009 and the profit of 2010. If the result is a positive number then 40% of that amount will be the tax bill in 2010. In the case that the company is profitable in 2010, the tax liability is, Tax Liability = (EBT 2009 + EBT 2010) tax rate(%), 2 where EBT 2009 is a negative number. That amount is subtracted from EBT 2010 to get Net Income in 2010. 8. Dividends will be suspended in 2009. In order to make a good faith showing to the bankers, the firm projects that dividends will only be 40% of net income in 2010. 9. Cash will be reduced from $161,800 at the end of 2008 to $100,000 at the end of 2009. According to the plan cash can be built up to $150,000 in 2010. 10. Short term investments will be liquidated during 2009. The firm hopes to build the balance back up to $100,000 in 2010.. 11. Copy-Tek has always maintained a lax collections policy so its DSO is very high. While this policy attracted customers, it may have attracted some of the wrong customers. With the recession unfolding many customers are dragging out payments even more. Some accounts may even be uncollectable. For 2009, it looks like receivables will rise to $1,300,000 and then resume a more normal relation to sales in 2010. What that means is that to find accounts receivable in 2010 you have to look at 2008 rather than 2009. 12. The sharp fall in sales also left the company with an excess of inventory. One of the cost saving measures that worked well in the past was to by-pass the wholesalers and order inventory directly from the factories. But this required ordering parts and supplies well in advance of their expected sales. The company expects inventories to grow to $1,030,000 in 2009 and then resume its proportionality to sales in 2010. That is, in order to find inventory in 2010 you need to calculate its relationship to sales in 2008 and use that relationship instead of the 2008 relationship. 13. Accounts Payable and Accruals will obey the default rules that we discussed in class for both 2009 and 2010. That is, whatever relationship they had to sales in 2008 will continue for 2009 and 2010. 14. There is nothing unusual about the liability side of the balance sheet. One can construct a proforma liability side using standard procedures. No new long term debt or common stock will be sold so those items will be the same for 2008, 2009, and 2010. Notes payable, which are all bank loans, should serve as the balancing item. 3 Copy-Tek Proforma Statements 2008 (Actual) 2009 (Projected) 2010 (Projected) Sales $8,000,000 CGS 4,800,000 Gross Profit 3,200,000 Admin Exp 2,400,000 Depreciation and Amor 152,110 EBIT 647,890 Net Interest Expense 214,729 EBT 433,161 Taxes (40%) 173,264 Net Income 259,896 Common dividends 155,938 Add. to R.E. 103,959 $6,000,000 $8,800,000 2,400,000 152,110 2,400,000 136,900 310,000 290,000 2008 (Actual) 2009 (Projected) 2010 (Projected) Assets: Cash Short-term investment Accounts Receivable Inventories Total C.A. Fixed assets Total assets 161,800 201,240 1,289,328 960,000 2,612,368 2,667,200 5,279,568 100,000 0 1,300,000 1,030,000 150,000 100,000 2,515,090 2,378,190 Liabilities and equity Accounts payable Accruals Notes payable Total C.L. Long-term debt Total liabilities Common stock Retained Earnings Total common equity Total liabilities and eq 400,000 320,000 468,510 1,188,510 1,320,900 2,509,410 1,757,680 1,012,480 2,770,160 5,279,570 Increase in Notes Payable New Notes Payable Post Loan Liabilities & Equity