Martin Manufacturing Company Income StatementFor the Year Ended December 31, 2014

Sales revenueLess: $5,075,000

Cost of goods sold 3,704,000

Gross ProfitLess: 1,371,000

Operating expenses

Selling expense $650,000

General and administrative expenses 416,000

Depreciation expense 152,000

Total operating expense 1,218,000

Operating profit 153,000

Less: Interest expense 93,000

Net profit before taxes 60,000

Less: Income Taxes 24,000

Net profit 36,000

*Preferred stock dividends of $3,000 were paid.

**EPS for common stock is $0.33

Martin Manufacturing Company Balance Sheet December 31, 2014

Assets

Current assets:

Cash $25,000

Accounts receivable $805,556

Inventory 700,625

Total current assets $1,531,181

Gross fixed assets (at cost) $2,093,819

Less: Accumulated depreciation 500,000

Net Fixed assets 1,593,819

Total assets 3,125,000

Liabilities and Stockholders Equity

Current liabilities:

Accounts payable $ 230,000

Notes payable 311,000

Accruals 75,000

Total Current Liabilities $ 616,000

Long-term debt 1,165,250

Total liabilities 1,781,250

Stockholders Equity

Preferred stock (2,500 shares) 50,000

Common stock (100,000

Shares @ $4.00 par) 400,000

Paid in capital 593,750

Retained earnings 300,000

Total Stockholders Eq 1,343,750

Total Liabilities and Stockholders Equity $3,125,000

***The firms 100,000 outstanding shares of common stock closed 2014 at a price of $11.38 Per share.

Data Table: Projected financial data for 2015:

Sales revenue $6,500,000

Minimum cash balance 25,000

Inventory turnover (times) 7.0

Average collection period 50 days

Fixed-asset purchases 400,000

Total dividend payments 20,000

Depreciation expense 185,000

Interest expense 97,000

Accounts payable increase 20%

Accruals and long-term debt unchanged

Notes payable, preferred and

Common stock Unchanged

Preparing Martin Manufacturings 2015 Pro Forma Financial Statements. To improve its competitive position, Martin Manufacturing is planning to implement a major equipment modernization program. Included will be replacement and modernization of key manufacturing equipment at a cost of $400,000 in 2015. The planned program is expected to lower the variable cost per unit of finished product. Terri Spiro, an experienced budget analyst, has been charged with preparing a forecast of the firms 2015 financial position, assuming replacement and modernization of manufacturing equipment. She plans to use the 2014 financial statements, along with the key projected financial data summarized in the attached table.

Respond to the following:

Use the historical and projected financial data provided to prepare a pro forma income statement for the year ended December 31, 2015. (Hint: Use the percent of sales method to estimate all values except depreciation and interest expense, which have been estimated by management and included in the table.)

Use the projected financial data along with relevant data from the pro forma income statement prepared in part (1) to prepare the pro forma balance sheet at December 31, 2015. (Hint: Use the judgmental approach.)

Will Martin Manufacturing Company need to obtain external financing to fund the proposed equipment modernization program? Explain.