Ms. Rice was sitting in her office thinking about the upcoming board meeting. Rice has recently joined KitchenArt as a CFO of the company. Smol-Kitchen is a producer of kitchenware and provides a diversified line of kitchen equipment. As such, the sales of Smol-Kitchen are not seasonal. Ms. Rice was working on creating the forecast pro-forma statements for next year, 2020. Historical Balance Sheets and Income Statement are provided below, along with some information Ms. Rice has entered into pro-forma statements already. She was forecasting a 15% sales growth and wants to do some sensitivity analysis: SCENARIO 1: First, she would like to create an Income Statement and Balance Sheet pro-forma where most accounts will grow spontaneously with sales. More specifically: o interest expense will remain constant and she has already included it in the next year pro-forma statements given the company's interest rates on loans and the amount of borrowing. o the tax rate (%) and the dividend payout rate (%) will also remain constant. o costs, other expenses, current assets, fixed assets, and accounts payable and other payable increase spontaneously with sales. o Ms. Rice plans to keep $55,000 for the minimum Cash Balance starting next year. She wants to ensure the firm has enough slack to withstand any temporary demand shocks due to unforeseen circumstances, including virus attacks, wars, and financial crises. o in 2019, the firm was not operating at full capacity, specifically the firm was operating its fixed assets at 80% capacity. Next year, the firm does not plan to sell any of their existing plant and equipment but will purchase new equipment to support growth if there is a need. SCENARIO 1a: Keeping all the assumption in scenario 1 above, Ms. Rice noticed that the company was not taking advantage of the discount provided by their suppliers. The trade credit terms are 2/15 net 40. Ms. Rice decided that next year the firm will start paying suppliers on-time in order to get the discount. To help her better understand how this change would alter the pro-forma statement(s) she created another version of the Balance Sheet pro-forma statement(s). SCENARIO 2: Ms. Rice also wants to consider a scenario that is close to "real-life for the firm and create another set of Income Statement and Balance Sheet pro-forma statements. While she is keeping some of the criteria from scenario 1 and la above she is also adding new criteria: Criteria that applies from scenario 1 and la: o interest expense will remain constant and she has already included it in the next year pro-forma statements given the company's interest rates on loans and the amount of borrowing. the tax rate (%) and the dividend payout rate (%) will also remain constant. o Ms. Rice plans to keep $55,000 for the minimum Cash Balance starting next year. She wants to ensure the firm has enough slack to withstand any temporary demand shocks due to unforeseen circumstances, including virus attacks, wars, and financial crises. O in 2019, the firm was not operating at full capacity, specifically the firm was operating its fixed assets at 80% capacity. Next year, the firm does not plan to sell any of their existing plant and equipment but will purchase new equipment to support growth if there is a need. o Ms. Rice decided that next year the firm will start paying suppliers on-time in order to get the discount. The trade credit terms are 2/15 net 40. New criteria: o last year the firm has undertaken cost-cutting efforts which included negotiating cheaper raw material prices. As such, Ms. Rice expects the Cost of Goods Sold (COGS) to fall to 65% of Sales next year. SMOL-KITCHEN Income Statement Pro-Forma 2020 (1) Pro-Forma 2020 (2) $ $ 32,220 $ 32,220 $ Sales COGS* Gross Profit Depreciation SG&A EBIT* / Operating Profit Interest paid Taxable income Taxes (35%) Net income Dividends Retained earnings Actual 2019 366,996 253,122 113,874 32,220 36,700 44,954 5,520 39,434 13,802 25,632 5,126 20,506 5,448 $ 5,448 $ $ * COGS is Cost of Goods Sold; EBIT is Earnings Before Interest and Taxes 2020 (1) 2020 (2) Profitability ratios: GM - Gross Margin OM - Operating Margin PM - Profit Margin ROA - Return on Assets 2019 31.03% 12.25% 6.98% 6.20% ROE - Return on Equity IS ROE change due to profitability? IS ROE change due to efficiency? IS ROE change due to leverage? ROE = PM*TAT*EM 9.14% 6.98% 0.89 1.47 9.14% SMOL-KITCHEN Balance Sheet Assets Actual 2018 Actual 2019 A (19-'18) Pro- Forma 2020 (1) PLUG Pro- Forma 2020 (1a) PLUG Pro- Forma 2020 (2) PLUG $55,000 $55,000 $24,046 $20,000 $25,392 $69,438 $24,607 $23,000 $27,155 $74,762 $561 $55,000 $3,000 $1,763 $21,577 $317,143 $386,581 $338,720 $413,482 Current assets Cash Accounts receivable Inventory Total Current Assets Fixed assets Net plant and equipment Total assets Liabilities and owners' equity Current liabilities Accounts payable Other payable Notes payable Total Current Liab. Long-term debt Owners' equity Common stock and paid-in surplus Accumulated retained earnings Total Owners' equity Total liabilities and owners' equity $18,909 $4,236 $3,359 ($1,200) $18,909 $23,184 $11,571 $12,000 $46,755 $80,000 $26,252 $27,420 $14,930 $10,800 $53,150 $80,000 $0 $40,000 $40,000 $0 $219,826 $259,826 $386,581 $240,332 $280,332 $413,482 $20,506 EFN 2020 2020 (1) 2020 (la) (2) 2019 1.41 0.90 0.46 Short-term liquidity ratios: 2018 Current ratio 1.49 Quick ratio 0.94 Cash ratio 0.51 Efficiency and Asset utilization ratios: TAT DIO DSO DPO (using COGS) CC OC Long-term solvency ratios: Total debt ratio 0.33 Debt-equity ratio EM = 1+D/E 1.49 Times interest earned 0.89 39.16 22.87 39.54 0.49 0.32 0.47 1.47 8.14 Ms. Rice was sitting in her office thinking about the upcoming board meeting. Rice has recently joined KitchenArt as a CFO of the company. Smol-Kitchen is a producer of kitchenware and provides a diversified line of kitchen equipment. As such, the sales of Smol-Kitchen are not seasonal. Ms. Rice was working on creating the forecast pro-forma statements for next year, 2020. Historical Balance Sheets and Income Statement are provided below, along with some information Ms. Rice has entered into pro-forma statements already. She was forecasting a 15% sales growth and wants to do some sensitivity analysis: SCENARIO 1: First, she would like to create an Income Statement and Balance Sheet pro-forma where most accounts will grow spontaneously with sales. More specifically: o interest expense will remain constant and she has already included it in the next year pro-forma statements given the company's interest rates on loans and the amount of borrowing. o the tax rate (%) and the dividend payout rate (%) will also remain constant. o costs, other expenses, current assets, fixed assets, and accounts payable and other payable increase spontaneously with sales. o Ms. Rice plans to keep $55,000 for the minimum Cash Balance starting next year. She wants to ensure the firm has enough slack to withstand any temporary demand shocks due to unforeseen circumstances, including virus attacks, wars, and financial crises. o in 2019, the firm was not operating at full capacity, specifically the firm was operating its fixed assets at 80% capacity. Next year, the firm does not plan to sell any of their existing plant and equipment but will purchase new equipment to support growth if there is a need. SCENARIO 1a: Keeping all the assumption in scenario 1 above, Ms. Rice noticed that the company was not taking advantage of the discount provided by their suppliers. The trade credit terms are 2/15 net 40. Ms. Rice decided that next year the firm will start paying suppliers on-time in order to get the discount. To help her better understand how this change would alter the pro-forma statement(s) she created another version of the Balance Sheet pro-forma statement(s). SCENARIO 2: Ms. Rice also wants to consider a scenario that is close to "real-life for the firm and create another set of Income Statement and Balance Sheet pro-forma statements. While she is keeping some of the criteria from scenario 1 and la above she is also adding new criteria: Criteria that applies from scenario 1 and la: o interest expense will remain constant and she has already included it in the next year pro-forma statements given the company's interest rates on loans and the amount of borrowing. the tax rate (%) and the dividend payout rate (%) will also remain constant. o Ms. Rice plans to keep $55,000 for the minimum Cash Balance starting next year. She wants to ensure the firm has enough slack to withstand any temporary demand shocks due to unforeseen circumstances, including virus attacks, wars, and financial crises. O in 2019, the firm was not operating at full capacity, specifically the firm was operating its fixed assets at 80% capacity. Next year, the firm does not plan to sell any of their existing plant and equipment but will purchase new equipment to support growth if there is a need. o Ms. Rice decided that next year the firm will start paying suppliers on-time in order to get the discount. The trade credit terms are 2/15 net 40. New criteria: o last year the firm has undertaken cost-cutting efforts which included negotiating cheaper raw material prices. As such, Ms. Rice expects the Cost of Goods Sold (COGS) to fall to 65% of Sales next year. SMOL-KITCHEN Income Statement Pro-Forma 2020 (1) Pro-Forma 2020 (2) $ $ 32,220 $ 32,220 $ Sales COGS* Gross Profit Depreciation SG&A EBIT* / Operating Profit Interest paid Taxable income Taxes (35%) Net income Dividends Retained earnings Actual 2019 366,996 253,122 113,874 32,220 36,700 44,954 5,520 39,434 13,802 25,632 5,126 20,506 5,448 $ 5,448 $ $ * COGS is Cost of Goods Sold; EBIT is Earnings Before Interest and Taxes 2020 (1) 2020 (2) Profitability ratios: GM - Gross Margin OM - Operating Margin PM - Profit Margin ROA - Return on Assets 2019 31.03% 12.25% 6.98% 6.20% ROE - Return on Equity IS ROE change due to profitability? IS ROE change due to efficiency? IS ROE change due to leverage? ROE = PM*TAT*EM 9.14% 6.98% 0.89 1.47 9.14% SMOL-KITCHEN Balance Sheet Assets Actual 2018 Actual 2019 A (19-'18) Pro- Forma 2020 (1) PLUG Pro- Forma 2020 (1a) PLUG Pro- Forma 2020 (2) PLUG $55,000 $55,000 $24,046 $20,000 $25,392 $69,438 $24,607 $23,000 $27,155 $74,762 $561 $55,000 $3,000 $1,763 $21,577 $317,143 $386,581 $338,720 $413,482 Current assets Cash Accounts receivable Inventory Total Current Assets Fixed assets Net plant and equipment Total assets Liabilities and owners' equity Current liabilities Accounts payable Other payable Notes payable Total Current Liab. Long-term debt Owners' equity Common stock and paid-in surplus Accumulated retained earnings Total Owners' equity Total liabilities and owners' equity $18,909 $4,236 $3,359 ($1,200) $18,909 $23,184 $11,571 $12,000 $46,755 $80,000 $26,252 $27,420 $14,930 $10,800 $53,150 $80,000 $0 $40,000 $40,000 $0 $219,826 $259,826 $386,581 $240,332 $280,332 $413,482 $20,506 EFN 2020 2020 (1) 2020 (la) (2) 2019 1.41 0.90 0.46 Short-term liquidity ratios: 2018 Current ratio 1.49 Quick ratio 0.94 Cash ratio 0.51 Efficiency and Asset utilization ratios: TAT DIO DSO DPO (using COGS) CC OC Long-term solvency ratios: Total debt ratio 0.33 Debt-equity ratio EM = 1+D/E 1.49 Times interest earned 0.89 39.16 22.87 39.54 0.49 0.32 0.47 1.47 8.14