Question
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-
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.
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