Mini-case # 2 (18 Marks) Burlington Industries Limited

Burlington Industries Limited (BIL) has assembled the following financial statements and other planning assumptions for you to prepare the financial plans for the coming year 2020.

Income Statement (All in $1,000 Canadian)

Burlington Industries Limited

For the Year ended December 31, 2019.

Sales Revenue $ 5,000

Less: Cost of Sales 2,750

Gross Margin $ 2,250

Less: Operating expenses 862

Less: Depreciation 88

Operating Income (EBIT) $ 1,300

Less: Interest expenses 100

Earnings Before Taxes $ 1,200

Less: Taxes @40% 480

Net Income after taxes $ 720

Cash Dividends paid $ 288

Balance Sheet (all in $1,000 Canadian)

Burlington Industries Limited

December 31, 2019

Assets Liabilities and Equity

Cash $ 200 Accounts payable $ 700

Marketable securities 275 Taxes Payable 95

Accounts Receivables 625 Line of Credit 200

Inventories 500 Other current Liabilities 5

Total Current Assets $ 1,600 Total Current liabilities $ 1,000

Net Fixed Assets 1,400 Long-term Debt $ 550

Common Shares 75

Retained Earnings 1,375

Total Assets $ 3,000 Total Liabilities and Equity $ 3,000

See Planning assumptions below:

Planning Assumptions for 2020: (All values expressed in $1,000)

1. Sales are projected to increase to $ 6,000 (20% increase from last year)
2. The following industry averages will be maintained for 2020:
   1. Gross Margin @ 50% of sales
   2. Operating expenses @ 20% of sales
   3. Depreciation increased to $110 (due to new asset bought for $500)
   4. Tax rate will drop to 35% instead of 40%
   5. No changes in cash, marketable securities, and other current liabilities
   6. Dividend payout ratio will be kept the same
   7. Taxes payable will be at 30% of the total estimated taxes owing from 2019
   8. Interest rate of line of credit will average 13%
   9. No change in the long-term debt having a charge rate of 12%
   10. Assume no changes to any other items not specified above.

3. BIL assumed the following as well:
   1. Average collection period 45 days
   2. Average age of inventory 65 days
   3. Average payment period 85 days based on Cost of Sales
   4. For EFN, the company will use internal resources as much as possible.

4. Some industry averages:
   1. Quick Ratio 1.20
   2. Asset Turnover 1.15
   3. L.T.D/Equity 0.40
   4. ROE 20%

Required:

1. Prepare the following for the year 2020:
   1. Proforma Income Statement 5 marks
   2. Proforma Balance Sheet 5 marks
   3. Statement of External Financing Needs 2 marks

2. Calculate the following ratios for the year 2020 based on your analysis:
   1. Quick Ratio, Asset turnover, Long-term / Equity ratio and ROE

and make a brief comment about the company overall. 4 marks

Assuming the cost of capital for BIL is 12%, is it sustainable?