Percent of Sales Technique Homework

XYZ Company Income Statement For the Year Ended 12/31/xxxx

Sales $140,000

Cost of Goods Sold 117,000

Gross Profit 23,000

Operating Expenses 12,830

EBIT 10,170

Interest Expense 4,610

EBT 5,560

Taxes @ 39% 2,168

Net Income 3,392

Dividend 1,018

Addition to Retained Earnings $2,374

XYZ Company Balance Sheet 12/31/xxxx

Assets

Current Assets

Cash $7,500

Accounts Receivable 12,100

Inventory 10,400

Prepaid Items 5,900

Other CA 4,300

Total Current Assets $40,200

Net Plant & Equipment 82,300

Total Assets $122,500

Liabilities & Equity

Current Liabilities

Accounts Payable $7,200

Wages Payable 3,600

Notes Payable 5,400

Taxes Payable 4,200

Total Current Liabilities $20,400

Long Term Debt 35,700

Total Liabilities $56,100

Common Stock 28,700

Retained Earnings 37,700

Total Liabilities & Equity $122,500

Homework Problem, contd

The projected sales for the forecast period is $165,000. Assume that the existing profit margin and payout ratio will be maintained in the forecast period. The firm estimates that additional net fixed asset investment of $18,000 will be required during the forecast period. Assume that all current assets are spontaneous except Other Current Assets which is assumed not to change. Assume that all current liabilities except Notes Payable are spontaneous.

A. Prepare the pro forma Balance Sheet and pro forma Income Statement. The EFR will be a plug number that makes the balance sheet balance like in the class example.

B. Using the existing financial statements as your basis, estimate firm XYZs EFR for the forecast period again, but this time using the cookbook model. Also based on the cookbook equation, how much funding is expected to come from each of the internal sources of funds (change in SL and retained earnings). If firm XYZ must maintain a minimum current ratio of 1.8 and a maximum debt ratio of 0.50, how would you propose the EFR be financed (how much short term debt, long term debt, and equity)?

C. Based on your results in part B, prepare a Pro Forma Sources and Uses of Funds Statement to reflect the financing allocations that you decided on in part B. The only format change required is to break the total EFR down into the amounts of short term debt, long term debt, and new equity. You will have to use the numbers for CA, SL, addition to R.E., and EFR that you calculated in part B to make it balance, since they may be slightly different than those from part A. Explain the basis for your financing allocations.

Answers to verify : Pro forma EFR = $18,589

Cookbook EFR = $18,941

Financinf plan with constraints at their limits

Additional notes payable : $2,820

Additional LTD : $11,861

Additional Equity : $4,260

a more conservative plan would use less debt, more equity