QUESTION 4 (16 marks) (35 minutes) The financial statements for Medway Inc. (are provided below). Although the company has not been growing, it now plans to expand and will increase net fixed assets by $200,000 per year at the end of the next 5 years. Medway forecasts that the ratio of Revenues to total assets will remain at 1.5 Net working capital will equal 50% of the end of year net fixed assets Annual depreciation is 10% of net fixed assets at the start of the year Fixed Costs are expected to remain at $75,000 and variable costs at 80% of revenue. The company's policy is to pay out 2/3 of its net income as dividends Maintain a Debt Ratio of 25% of total assets (eg $1,500 x 25% = $375 Debt) Revenues are expected to increase by 20% in 2020 i) ii) REQUIRED: Prepare a Pro-forma Income Statement and Balance Sheet for 2020. (12 marks) Now assume that the balancing item is debt and that no equity is to be issued. Prepare the Liabilities and Equity portion of the Pro-forma Balance Sheet for 2020. What is the projected debt ratio for 2020? (4 marks) Revenue Fixed Costs Variable Costs (80% of revenue) Depreciation Interest (8% of begin yr. debt) Taxable income Taxes @ 40% Net income Medway Inc. Income Statement for year-ended December 31, 2020 Dividends Addition to retained earnings Assets Net working capital Net fixed assets Total assets ($000's) Liabilities and shareholder's equity Debt Balance Sheet As at Dec 31, 2018 $2,250 75 1,800 100 30 245 98 $147 98 49 Shareholder's Equity Total Liabilities and Shareholder's Equity $ 500 1,000 net of depreciation) $1,500 $375 1,125 $1,500