I need you to analyze the answer in two paragraphs

Example: Robertson Industries (RI) is creating projections of its financial for the next three years. Analysts predictions for average annual GDP growth for the period is 2.5%. A regression of industry growth vs. GDP growth is:

Industry growth = 0.13% + 0.9105 GDP growth

RIs 2014 income statement (in thousands) is:

Sales $10,000

COGS (6,500)

SG&A (excluding depreciation) (2,000) Depreciation expense (500)

Interest expense (150)

EBT $850

Taxes @ 40% (340)

Net Income $510

Example (cont.): RIs market share is 10%, but RI expects it to grow to 12% over the next 5 years. The net PP&E is $5,000,000, and RI plans to expand it each year at the same rate of growth as projected sales; fixed capital investment will be financed 20% with cash and 80% with long-term bonds with a 6% coupon rate. RI expects that COGS and SG&A (excluding depreciation) will remain a constant percentage of sales, and that the 40% income tax rate will not change.

Create pro forma income statements for RI for 2015, 2016, and 2017.

The annual industry growth rate is estimated to be:

0.13% + 0.9105(2.50%) = 2.41%

RIs annual growth rate of market share is estimated to be:

(12%/10%)1/5 1 = 3.71%

Example (cont.):

RIs expected annual growth rate in sales is:

(1.0241)(1.0371) 1 = 6.21%

Projected PP&E, change in PP&E, change in Bonds Payable, change in Depreciation, and change in Interest Expense (in thousands) are:

2015 2016 2017

PP&E $5,311 $5,641 $5,991

PP&E 311 330 350

Bonds Payable 249 264 280

Depreciation 31 33 35

Interest expense 15 16 17

Example (cont.):

RIs pro forma income statements:

2015 2016 2017

Sales $10,621 $11,281 $11,982

COGS (6,904) (7,333) (7,788)

SG&A (excluding depreciation) (2,124) (2,256) (2,396)

Depreciation expense (531) (564) (599)

Interest expense (165) (181) (198)

EBT $897 $947 $1,001

Taxes @ 40% (359) (379) (400)

Net Income $538 $568 $600