Problem 12-9 Financing Deficit

Garlington Technologies Inc.'s 2016 financial statements are shown below: Balance Sheet as of December 31, 2016

Cash $ 180,000 Receivables $360,000 Inventories $720,000 Total current assets $1,260,000 Fixed assets $1,440,000 Total assets $2,700,000

Accounts payable $360,000 Notes payable $156,000 Line of credit 0 Accruals $180,000 Total current liabilities $696,000 Common stock $1,800,000 Retained earnings $204,000

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 10% over 2016 sales and that 2017 dividends will increase to $188,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 9%, 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 AFN will be in the of 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 $3,960,000 Operating costs $3,607,692 EBIT $352,307 Interest $14,040 Pre-tax earnings $338,268 Taxes (40%) $135,307.20 Net income $202,2960 Dividends: $188,000 Addition to RE: $14,960.80

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 $