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 credit0 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 $136,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 10%, 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$

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