Problem 12-09

Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016

Cash

$180,000

Accounts payable

$360,000

Receivables

360,000

Notes payable

156,000

Inventories

720,000

Line of credit

0

Total current assets

$1,260,000

Accruals

180,000

Fixed assets

1,440,000

Total current liabilities

$696,000

Common stock

1,800,000

Retained earnings

204,000

Total assets

$2,700,000

Total liabilities and equity

$2,700,000

Income Statement for December 31, 2016

Sales

$3,600,000

Operating costs

3,279,720

EBIT

$320,280

Interest

18,280

Pre-tax earnings

$302,000

Taxes (40%)

120,800

Net income

181,200

Dividends

$108,000

Suppose that in 2017 sales increase by 15% over 2016 sales and that 2017 dividends will increase to $194,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 11%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations.

Garlington Technologies Inc.

Pro Forma Income Statement

December 31, 2017

Sales

$

Operating costs

$

EBIT

$

Interest

$

Pre-tax earnings

$

Taxes (40%)

$

Net income

$

Dividends:

$

Addition to RE:

$

Garlington Technologies Inc.

Pro Forma Balance Statement

December 31, 2017

Cash

$

Receivables

$

Inventories

$

Total current assets

$

Fixed assets

$

Total assets

$

Accounts payable

$

Notes payable

$

Accruals

$

Total current liabilities

$

Common stock

$

Retained earnings

$

Total liabilities and equity

$