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Use the following information for Delta Corporation to answer question 1: (20 marks total)

Year	20X1	20X2
Net sales	$1,500,000	$1,656,598
Cost of goods sold	675,000	745,469
Depreciation	270,000	298,188
Interest paid	43,600	44,000
Cash	127,500	140,811
Accounts receivable	450,000	496,980
Inventory	525,000	579,809
Net fixed assets	1,800,000	1,987,918
Accounts payable	375,000	414,150
Notes payable	45,000	50,000
Long-term debt	500,000	500,000
Common stock	1,000,000	1,000,000
Retained earnings	982,500	1,241,368
Tax rate	35%	35%
Dividend payout	30%	30%

1. Delta has 600,000 common shares outstanding. The firm is projecting a 20% increase in net sales for the coming year (20X3). Delta uses the percentage of sales approach to plan for its financing needs. In using this approach, the firm assumes that cost of goods sold, all assets (current and fixed), and accounts payable will all remain a constant percentage of sales. Depreciation expense is assumed to be 15% of net fixed assets, while notes payable and long-term debt will remain at the same level as 20X2. The interest rate charged on notes payable and long-term debt is also expected to remain the same. The firm will aim to maintain its dividend payout of 30% for the foreseeable future.

a. Construct the pro-forma Statement of Comprehensive Income and Statement of Financial Position for Delta Corporation for 20X3. Calculate the external financing needed (EFN) for 20X3. Round all your numbers in the pro-forma statements to the nearest dollar. (4 marks)

Pro-forma Statement of Comprehensive Income Delta 20X3

Net Sales ($1,656,598+20%)	$1,987,918.00
COGS (45% of sales)	$894,563.00
Depreciation (18% of sales)	$357,825.00
Interest (8% of notes payable/long-term debts)	$44,000.00
Income before tax	$691,530.00
Taxes (35%)	$242,036.00
Net Income	$449,494.00
Dividends (30%)	$134,848.00
Additions to Retained Earnings	$314,646.00

Pro-forma Statement of Financial Position 20x3

Assets	Amount ($)	Liabilities	Amount ($)
Current Assets		Current Liabilities
Cash (8.5% of sales)	168,973	AP (25% of sales)	496,980
AR (30% of sales)	596,375	Notes Payable (n/a)	50,000
Inventory (35% of sales)	695,771	Total	546,980
Total	1,461,119
		Long-term debt (n/a)	500,000
Fixed Assets (120% of sales)	2,385,502	Owners Equity
		Common Stock (n/a)	1,000,000
		Retained Earnings (n/a)	1,241,368
		Total	2,241,368
		EFN (Balancing figure)	558,273
Total Assets	3,846,621	Total Liabilities and Owners Equity	3,846,621

b. Based on its 20X2 information, what is Deltas capital intensity ratio? Round your answer to four decimal places. (1 mark)

Total assets/sales = 3,846,621/$1,987,918.00 = 1.93

It will take $1.93 in total assets to generate $1 in sales

c. What is Deltas full capacity sales if it is currently operating at 80% capacity (20X2)? Round your answer to the nearest integer. (1 mark)

If at 80% sales = $1,656,598

Then at 100%, full capacity sales = 1,656,598/0.8= $2,070,748.00

d. Recalculate the firms external financing needed (EFN) for 20X3 if Delta is only operating at 80% capacity. Assume that if the 20X3 net sales is lower than full capacity sales, then the net fixed assets in 20X3 will be the same as the net fixed assets in 20X2 (i.e., assume that the firm will purchase just enough fixed assets to cover depreciation expense for 20X3). Interpret this EFN number. (5 marks)

e. What is Deltas internal growth rate for 20X2? Round your final answer in percentage to two decimal places. (2 marks)

f. What is Deltas sustainable growth rate for 20X2? Round your final answer in percentage to two decimal places. (2 marks)

g. Assume that Delta is operating at 100% capacity. Calculate the EFN for the firm if it wants to grow its sales by 100% for 20X3. Interpret this EFN number. (5 marks