Question
Problem 1. Prepare a pro forma income statement and balance sheet for Webb Enterprises (see balance sheet and income statement below), where revenues are expected
Problem 1. Prepare a pro forma income statement and balance sheet for Webb Enterprises (see balance sheet and income statement below), where revenues are expected to grow by 20% in 2016. Make the following assumptions in making your forecast of the firm's balance sheet for 2016:
The income statement expenses are a constant percentage of revenues except for interest, which remains equal in dollar amount to the 2015 level, and taxes, which equal 40% of earnings before taxes.
The cash and marketable securities balance remains equal to $500, and the remaining current assets accounts increase in proportion to revenues for 2015.
Net property, plant, and equipment increase in proportion to the increase in revenues and depreciation expenses for 2016 is $2,000.
Accounts payable increases in proportion to firm revenues.
Owner's equity increases by the amount of firm net income for 2011 (no cash dividends are paid).
Long-term debt remains unchanged, and short-term debt changes in an amount that balances the balance sheet.
Given: Problem 1 | ||
Balance Sheet | 2015 | |
Cash and marketable securities | $500 | 1.52% |
Accounts receivable | $6,000 | 18.18% |
Inventories | $9,500 | 28.79% |
Current assets | $16,000 | 48.48% |
Net property, plant, & equipment | $17,000 | 51.52% |
Total | $33,000 | 100.00% |
Accounts payable | $7,200 | 21.82% |
Short-term debt | $6,800 | 20.61% |
Current liabilities | $14,000 | 42.42% |
Long-term Debt | $7,000 | 21.21% |
Total liabilities | $21,000 | 63.64% |
Total owner's equity | $12,000 | 36.36% |
Total liabilities and owners' equity | $33,000 | 100.00% |
Income Statement | 2015 | |
Revenues | $30,000 | 100.00% |
Cost of goods sold | ($20,000) | -66.67% |
Gross profit | $10,000 | 33.33% |
Operating expenses | ($8,000) | -26.67% |
Net operating income | $2,000 | 6.67% |
Interest expense | ($900) | -3.00% |
Earnings before taxes | $1,100 | 3.67% |
Taxes | ($400) | -1.33% |
Net Income | $700 | 2.33% |
Project growth rate in revenues | twenty% | |
Tax rate | 40% |
Solution: Problem 1 | |
Pro form Income Statement | 2016 |
You go out | |
Cost of Goods Sold | |
Gross Profit | |
Operating Expenses | |
Net Operating Income | |
Interest Expense | |
Earnings before Taxes | |
Taxes | |
Net Income | |
Balance Sheet | 2016 |
Cash and Marketable Securities | |
Accounts Receivable | |
Inventories | |
Current Assets | |
Net, Property Plant, & Equipment | |
Total | |
Accounts Payable | |
Short-term Debt | |
Current Liabilities | |
Long-term Debt | |
Total liabilities | |
Total Owner's Equity | $12,000 |
Total Liabilities and Owner's Equity | |
Additional Short-term Debt Needed |
Question 1. Fill in the blanks in the solution section.
Problem 2. Using your pro forma financial statements from Problem 1, estimate the firm's FCF for 2016.
Solution: Problem 2 | |
Estimate Free Cash Flow | 2016 |
EBIT | |
- Taxes | |
NOPAT | |
+ Depreciation and Amortization | |
- Increase in Operating Net Working Capital | |
- CAPEX | |
= Free Cash Flow |
Note: Depreciation expense for 2016 = $2,000
Question 2. Fill in the blanks in the solution section.
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