Lotus Company $-$ Proforma Analysis

Financial planning can be more complex than the parcentage of sales approach Often, the assumptions behind the percentage of sales approach may

be incorrect. For example, if the amount of fixed assets increases, then depreciation will increase. A more sophisticated model allows these

input variables to vary rather than being a strict percentage of sales.

This model used new borrowing as the plug variable by setting total liabilities and ouners' equity equal to total assets. Nest,

the ending amount of owners' equity is calculated as the beginning amount plus the additions to retained eamings. The difference

between these amounts is the total debt necessary to balance the balance sheet.

The main difference between this model and the percentage of sales approach is that we have separated out depreciation and interest.

Depreciation is calculated as a percentage of beginning fixed assets, and the amount of interest depends on the amount of debt.

However, since depreciation and interest now do not necessarily vary directly with sales, the profit margin is no longer constant.

The model parameters can be based on a percentage of sales model, or they can be determined by other means the company deems appropriate.

For example, they might be based on average values for the last several years, industry standards, subjective estimates, or even company targets. Alternativ

The parameter estimates used in this calculation of proforma financial statements are:

The Lotus Company is preparing its pro forma financial statements for the next year using this model. The abbreviated financial

statements are presented below.

Note: Beginning Fixed Asgets $=$

a$.(40$ Points$)$ Calculate the necessary ratios and parameters needed for financial planning in preparation for constructing the proforma balance sheet.

b$.(40$ Points$)$ Construct the proforma financial statements $($ie$.,$ income statement and balance sheet$)$ using the parameters you calculated.

Your proforma balance sheet should balance. What is the total debt necessary to balance the proforma balance sheet?