Income Statement

Sales- 140,000

COGS- 117,000

GP- 23,000

Op Expenses- 12,830

EBIT- 10,170

Intrest Expense- 4610

EBT- 5,560

Taxes @39%- 2,168

Net Income 3,392

Dividend- 1,018

Addition to Retained Earnings- 2,374

Balance Sheet (Assets)

Current Assets:

Cash- 7,500

A/R- 12,100

Inventory- 10,400

Prepaid Items- 5,900

Other CA- 4,300

Total Current Assets- 40,200

Net Plant & Equipment- 82,300

Total Assets- 122,500

Balance Sheet (Liabilities & Equity)

CL:

Accounts Payable- 7,200

Wages Payable- 3,600

Notes Payable- 5,400

Taxes Payable- 4,200

Total Current Liabilities- 20,400

Long Term Debt- 35,700

Total Liabilities- 56,100

Common Stock- 28,700

Retained Earnings- 37,700

Total Liabilities and Eq- 122,500

The projected sales for the forecast period is $165,000. Assume that the payout ratio will be maintained in the forecast period. The firm estimates that additional net fixed asset investment of $18,000 will be required during the forecast period. Assume that all current assets are spontaneous except Other Current Assets which is assumed not to change. Assume that all current liabilities except Notes Payable are spontaneous.

A. Prepare the pro forma balance Sheet and pro forma income sheet. The EFR will be a plug number that makes the balance sheet balance.

B. Using the existing financial statements as your basis, estimate the firms EFR for the forecast period again, but this time using the cookbook model. Assume that the profit margin remains the same in the forecast period. Also based on the cookbook equation, how much funding is expected to come from each of the internal sources of funds (change in SL and retained earrings). If the firm must maintain a minimum current ratio of 1.8 and a maximum debt ratio of .50, how would you propose the EFR be finances (how much short term debt, long term debt, and equity)?

C. Based on your results in part B, prepare a Pro Forma Sources and Uses of Funds Statement to reflect the financing allocation that you decided in part B. The format change required is to break the total EFR down into the amounts of short term debt, long term debt, and new equity. You will have to use the numbers for change in CA, change in SL, addition to term RE, and EFR. the you calculated in part B to make it balance, since they may be slightly different than those from part A. Explain the basis for your financing allocations.

Hints:

Pro forma Ta= Existing TA+ change in CA + change in NFA

Max Pro Forma total liabilities= (DR Constraint)(Pro forma TA)

Max additional TL + Mac Pro forma TL - existing TL

Max additional external debt = Max additional TL - change in SL

Min additional external equity = EFR - Max additional external debt

Pro forma CA = Existing CA+ change in CA

Max pro formula CL = Pro Forma CA / CR Constraint

Max additional CL = Max pro forma CL - existing CL

Max additional notes payable (n/p) = max additional CL - change in SL

Additional LTD = Max additional external debt - max N/P

Check Answers

Pro forma EFR = 18,589

Cookbook EFR = 18,941

Financing plan with constraints at their limits

Additional notes payable = 2,820

Additional LTD = 11,861

Additional Equity = 4,260

A more conservative plan would use less debt more equity.