PART I:

Use the following information on Company Y and perform pro-forma financial modeling using a planned expansion method to answers the following questions. To do this assume that the percentage values with respect to sales of the 2020 (i) costs except depreciation, (ii) cash and equivalents, (iii) accounts receivable, (iv) inventories, and (v) accounts payable will remain fixed at their respective percentage values in 2019. Assume also that income tax will remain at 30% of the Pretax Income. Company Y sells a product for which in 2019 the total market size was of 500,000 units, of which Company Y owned a share of 20%. Both, the total market size and Company Y s market share are expected to grow at a 25% yearly rate for the next five years. The price of the product is $114 in 2019 and is expected to remain at that price for the next years.

TABLE B.1	Market Analysis	2019	2020	2021	2022
	Market Size	500,000	625,000	781,250	976,563
	Market Share	20.000%	25.000%	31.250%	39.063%
	Production Volume	100,000
	Average Sales Price:	114
	Sales

In 2019, the outstanding debt of Company Y is $250,000, for which the company makes yearly interest payments of 8%. The executives of Company Y are considering making a significant capital investment in 2020 of $1,000,000 to purchase new machinery. The company plans to finance this investment with a 30-year loan that makes yearly interest payments equivalent to 8% of its principal. The principal is paid when the loan matures. The following table summarizes the debt and interest payment of Company Y.

TABLE B.2	Debt and Interest Table	2019	2020	2021
	Outstanding Debt	250,000	250,000	1,250,000
	New Net Borrowing		1,000,000
	Interest on Debt

Currently, Company Y makes yearly expenditures on replacement capital investment of $25,000. If the company makes the planned expansion, it has been decided that it will continue making replacement capital investment of $25,000 until and including 2020; and starting in 2021 it will perform yearly expenditures on replacement capital investment of $70,000. The current and the planned expenditures on replacement of capital investment will be financed by the company s cash flow. The following table indicates for 2019 Company Y s values of i. opening book value, ii. capital investment, iii. depreciation, and iv. closing book value. The Table also indicates the 2020-2021 forecast values of capital depreciation if the planned expansion were to occur in 2020. Because no decision has yet been done about dividends, before making any balancing adjustments to the Balance Sheet, assume that these will be $0 in 2020.

TABLE B.3	Fixed Assets & Capital Investment	2019	2020	2021
	Opening Book Value	500,000
	Capital Investment	25,000
	Depreciation	-26,250	-76,188	-75,878
	Closing Book Value	498,750

The following table contains Company Y s income statement for 2019.

TABLE B.4	Income Statement:	2019	2020
	Sales	11,400,000
	Costs except Depr.	-6,840,000
	EBITDA	4,560,000
	Depreciation	-26,250
	EBIT	4,533,750
	Interest Expense (net)	-20,000
	Pretax Income	4,513,750
	Income Tax	-1,354,125
	Net Income	3,159,625

The following table contains Company Y s balance sheet for 2019.

TABLE B.5	Balance Sheet - Assets:	2019	2020
	Assets
	Cash and Equivalents	5,130,000
	Accounts Receivable	5,700,000
	Inventories	2,280,000
	Total Current Assets	13,110,000
	Property, Plant and Equipment	498,750
	Total Assets	13,608,750
	Balance Sheet - Liabilities and Equity:	2019	2020
	Liabilities
	Accounts Payable	1,140,000
	Total Current Liabilities	1,140,000
	Debt	250,000
	Total Liabilities	1,390,000
	Stockholders' Equity
	Starting Stockholders' Equity	1,000,000
	Net Income	3,159,625
	Dividends	8,059,125
	Stockholders' Equity	12,218,750
	Total Liabilities and Equity	13,608,750

QUESTION 12

1. What option can the financial managers of Company Y implement in order to balance Total Assets and Total Liabilities and Equity for 2020?

   		Increase the debt by the absolute value of the amount indicated in your calculations of net new financing;
   		Increase dividends by the absolute value of the amount indicated in your calculations of net new financing;
   		Either of a. or b. would work;
   		Neither of a. or b. would work;

10 points

QUESTION 13

1. "Before making additional balancing adjustments to the Balance Sheet, what is the forecasted value of Net Working Capital for 2020? Express the numerical terms of your answer completely. For example: If your answer is one million dollars, write: 1000000."

10 points

QUESTION 14

1. "Before making additional balancing adjustments to the Balance Sheet, what is the forecasted Increase of Net Working Capital for 2020? Express the numerical terms of your answer completely. For example: If your answer is one million dollars, write: 1000000."

10 points

QUESTION 15

1. "Before making additional balancing adjustments to the Balance Sheet, what is the forecasted value of Free Cash Flow for 2020? Express the numerical terms of your answer completely. For example: If your answer is one million dollars, write: 1000000."